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Five Ways That Crypto Asset Reporting Framework Can Impact Indian Institutions, Investors




India is one of the few early signatories and adopters to the Multilateral Competent Authority Agreement (MCAA) which provides a standardised and efficient mechanism to facilitate automatic exchange of information (Common Reporting Standard or CRS) released by rhw Organization for Economic Co-operation and Development (OECD). It avoids the need for multiple bilateral agreements.

CRS was designed on the lines of the US Foreign Account Tax Compliance Act (FATCA), to promote tax transparency on reporting of financial accounts. Since the adoption of the CRS, financial markets have evolved, giving rise to new investment assets and payment practices. The OECD, along with G20 countries, has conducted the first comprehensive review of the CRS in consultation with participating jurisdictions, financial institutions and other stakeholders. This triggered creation of a new tax transparency framework, which promotes automatic exchange of tax information on transactions in crypto assets (Crypto-Asset Reporting Framework or CARF), and also kicked off amendments to the CRS. In October 2022, the OECD discussed the CARF, which it had approved in August 2022, in a meeting with G20 countries, where the amendments to CRS were also taken up.

Crypto-Asset Reporting Framework

Crypto-Asset Reporting Framework (CARF) contains rules and commentary that can be included into domestic law to collect information from the reporting crypto asset service providers.

CARF rules are designed to include the scope of crypto assets to be covered, entities and individuals subject to data collection and reporting requirements, the reportable transactions and the due diligence procedures to identify crypto asset users and the relevant tax jurisdictions for reporting and exchange purposes.

Scope of Crypto-Assets Covered

Crypto assets are assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries, including derivatives and are also issued in the form of certain non-fungible tokens (NFTs), using cryptographically secured Distributed Ledger Technology (DLT) or similar technology.

Crypto-assets exclude assets that cannot be used for payment or investment purposes, Central Bank Digital Currencies (CBDCs) and Specified Electronic Money Products (SEMP) that represent a single fiat currency and are redeemable at any time in the same fiat currency at par value.

Reporting Entities

In CRS, an individual cannot be a reporting financial institution (RFI) and hence does not have to file a report; only an entity which is an RFI, identifies reportable accounts and files the report. Unlike CRS, the CARF requires that entities or individuals involved in exchange transactions in crypto assets, for or on behalf of customers, be considered as crypto asset service providers and hence will be required to report such transactions.

The reporting crypto assets service provider (generally crypto asset exchanges, broker and dealers, wallet providers, crypto asset ATM providers, etc.) will inter alia be subject to CARF Rules when the individual or entity is either tax resident of a jurisdiction or an entity incorporated in a jurisdiction or is subject to tax reporting requirements in a jurisdiction or an entity managed from a jurisdiction or such entity or individual with regular place of business or effects relevant transactions through a branch based in the jurisdiction adopting the rules. Hierarchy of nexus rules is to be adopted in case a reporting crypto assets service provider has nexus with more than one jurisdiction.

What Are The Reporting Requirements?

Relevant transactions reportable under CARF are exchanges between relevant crypto assets and fiat currencies, exchanges between one or more forms of relevant crypto assets and transfers (including reportable retail payment transactions) of relevant crypto assets. Reporting is also to be done for transfer of relevant crypto assets to wallets not associated with a virtual asset service provider or a financial institution and cases where crypto asset service provider processes payments on behalf of a merchant accepting relevant crypto assets in payment for goods or services.

Detailed valuation rules for relevant crypto assets have been provided in the commentary.

Transfer types include airdrops, income derived from staking or a loan, where the reporting crypto assets service providers have such knowledge. Crypto staking involves when one can earn cryptocurrency as a reward for using existing holdings to vouch for or support a blockchain network transactions.

Due Diligence Procedures And Information To Be Reported Under CARF

The due diligence process is built on the self-certification based process as well as existing AML/KYC obligations in the FATF recommendations. Amongst others, crypto asset service provider to report details of crypto assets such as full name of the type, transaction type, amount, etc.


India has already initiated the process of inclusion of crypto assets or virtual digital assets (VDA) reporting and taxation under its tax law. The Finance Act 2022 introduced taxation at 30 per cent plus surcharge and cess, on gains arising from virtual digital assets (VDAs), with effect from 1 April 2022. VDAs have been defined inter alia to mean any information or code or number, or token (not being Indian or foreign currency), providing a digital representation of value exchanged, an NFT or any other digital asset which the central government may notify.

Effective 1 July 2022, a person responsible for paying to any resident any consideration for transfer of VDA, shall deduct tax at the rate of 1 per cent, subject to certain thresholds. The withholding provisions under section 194S cover transfer of VDAs wholly in kind or in exchange of another VDA, or partly in cash and partly in kind.

The VDA exchange shall be required to furnish a quarterly statement to income-tax authorities.

Indian resident taxpayers are required to provide information of bank accounts and assets held outside India in the annual income-tax return filed in India, hopefully covering crypto assets held overseas.

The Companies Act 2013 requires disclosure of various details of crypto currency in the financial statements of companies with effect from 1 April 2021. The Ministry of Corporate Affairs (MCA) has amended Schedule III of the Companies Act, 2013, requiring companies to inter alia disclose profit or loss on transactions involving cryptocurrency or virtual currency, amount of currency held on reporting date, deposits or advances from any person for the purpose of trading or investing in cryptocurrency.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is under consideration and inter alia seeks to prohibit all private cryptocurrencies in India. In July 2022, the Reserve Bank of India (RBI) recommended a ban on cryptocurrencies stating that it may result in destabilizing the country’s monetary and economic health. On 7 October 2022, RBI published a concept note on Central Bank Digital Currency (CBDC) to create awareness about CBDCs and explain the approach to create a digital currency. The note contains CBDC framework, features of CBDC, recommendations given in a Feb 2021 report, types and design of CBDCs, technology considerations for CBDCs, implications of CBDCs for monetary policy in India, etc.

Five Ways That CARF Can Impact Indian Entities

  1. Automatic exchange of information on crypto assets globally – crypto assets exchanged globally by tax residents of India could be reported to India leading to taxation and enquiry on source of funds.
  2. Crypto assets service provider in India required to report under CARF – would this lead to regulation of crypto asset intermediaries.
  3. Not only financial entities but any entity and even individuals may require reporting under CARF.
  4. Harmonising the provisions of CARF and VDA under Indian tax laws.
  5. CARF could assist in anti-money laundering measures by enhanced reporting requirements.

(Bahroze Kamdin is partner at Deloitte India; Vidya Mallya is senior manager with Deloitte Haskins and Sells LLP)

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