India Considers Taxing Crypto Income From Businesses Headquartered Elsewhere

India’s taxation authority has proposed new changes to the filing of income tax returns that could have a significant impact on those holding virtual digital assets (VDA) or cryptocurrencies or possibly even investments in decentralized autonomous organizations (DAO).

The Central Board of Direct Taxes (CBDT) has proposed a new common tax return (ITR), which largely consolidates existing income tax returns to make it a smoother process. But the proposal also seeks information from Indians residing abroad about any business connections they may have in India, and whether that entity has a significant economic presence (SEP) in India – particularly businesses from which they draw income.

This may have an impact on any crypto exchanges that are not incorporated in India but still have Indian traders, said Rajat Mittal, a tax counsel in India's Supreme Court advising crypto businesses.

"A lot of Indian customers are on these exchanges, and this might result in Significant Economic Presence (SEP) for these exchanges. If these exchanges have SEP in India, they might be required to discharge the equalization levy," he said.

The equalization levy, which is essentially a foreign company operating tax, was introduced in 2016 with the intention of taxing digital transactions or income that foreign e-commerce companies made from India.

The CBDT has invited comments on the draft from stakeholders and the general public by Dec. 15, 2022.

Many creative professionals, startup founders and those working in the digital economy or Web 3 space have moved abroad due to both the COVID-19 pandemic and the Web 3 revolution allowing for remote workers. The proposed changes to the form could be aimed at people who might have some business connections in India despite leaving.

The new proposal also asks taxpayers questions about their investments, including investments in unincorporated entities. This raises the question of whether an investment in a DAO is an investment in an unincorporated entity.

India has not introduced crypto-specific regulation but imposed what the local industry has criticized as a crippling tax regime while the country's central bank has called for a ban on cryptocurrencies.

Read More: India Passes Stiff Crypto Tax Laws Despite Industry Uproar