Govt cracks down on crypto tax evasion using AI, collects ₹437 cr from VDAs in FY23

The Indian government is stepping up its measures to ensure tax compliance within the burgeoning cryptocurrency sector. By harnessing artificial intelligence (AI) and data analytics tools, the Income Tax Department aims to trace and address evasion issues related to virtual digital assets (VDAs). As a result, the government collected Rs 437 crore from VDA-related income in the financial year 2022-23. This move marks a significant tightening of scrutiny over cryptocurrency transactions, aiming to curb tax evasion effectively.

In response to queries raised in Parliament, the government outlined that “several capacity-building initiatives are being undertaken by the Government to equip officers for effective compliance monitoring and investigation of VDA related transactions.” These initiatives include specialised workshops, webinars, and short-term training programs in partnership with institutions like the National Forensic Science University (NFSU), Goa. These efforts are designed to empower officers with skills in digital forensics, blockchain analysis, and handling of digital evidence, thus enhancing their ability to track and investigate VDA transactions.

Moreover, the government has acknowledged that “real-time matching of VDA-related transactions, filed in income tax returns, with information filed by Virtual Asset Service Providers (VASPs) is not being carried out.” Instead, discrepancies in reported transactions are identified through an analysis of Tax Deducted at Source (TDS) returns filed by VASPs and income tax returns filed by taxpayers. The Central Board of Direct Taxes has launched the NUDGE campaign to address these discrepancies, sending communications to taxpayers who failed to report VDA-related transactions exceeding Rs 1 lakh.

The introduction of a tax on income from the transfer of VDAs under section 115BBH of the Income Tax Act, 1961, began with the financial year 2022-23. Although no estimates have been made regarding potential revenue losses due to under-reporting, the government’s utilisation of data analytics tools, including the Non-Filer Monitoring System (NMS) and project insight, underscores its commitment to mitigating this issue. These systems correlate information from various databases to identify discrepancies in income declarations by taxpayers.

The deployment of AI and machine learning in tax compliance highlights the government’s proactive approach to managing the complexities of cryptocurrency taxation. The comprehensive training and systems in place indicate a structured strategy aimed at improving tax collection and compliance.

This enhanced scrutiny is part of a broader government strategy to close gaps in tax reporting, particularly in the rapidly evolving digital asset ecosystem. By leveraging technology and training, the aim is to strengthen oversight and ensure that tax obligations related to cryptocurrency transactions are met.

Members of Parliament, including Lavu Sri Krishna Devarayalu and G M Harish Balayogi, have actively engaged with the government on this issue, seeking clarity on tax collection, potential losses, and the technological methodologies employed. These discussions have illuminated the government’s efforts and challenges in monitoring this nascent sector.

The ongoing initiatives and technological implementations by the government reflect a significant shift towards digitalisation and sophistication in tax administration. As cryptocurrency continues to gain traction, these measures signify a commitment to fostering a compliant and transparent financial environment.