Indian government flags crypto system as ‘high risk’ to parliamentary panel

India’s government just told its own lawmakers what crypto skeptics have been saying for years: the virtual digital assets ecosystem is a minefield. In a note presented to the Parliamentary Standing Committee on Finance, senior officials formally categorized the entire VDA sector as “high risk,” citing intelligence reports that link it to everything from drug trafficking to cyber fraud.

The classification isn’t just regulatory posturing. It’s backed by a compliance gap so wide you could drive a truck through it. In FY23, only 1.39 lakh out of 6.45 lakh individuals subject to Tax Deducted at Source on crypto transactions actually reported their income. In English: roughly 78% of people who traded crypto and had taxes withheld simply didn’t bother telling the tax authorities about it.

What the committee heard

The parliamentary review, chaired by BJP MP Bhartruhari Mahtab, took place around May 20-21 and covered a lot of ground. The committee examined informal meetings held with major crypto exchanges operating in or adjacent to the Indian market, including Binance, WazirX, and ZebPay.

Those exchanges pushed for greater regulatory clarity and a more rational tax framework. The current regime, a flat 30% tax on VDA gains plus a 1% TDS introduced in 2022, has been a persistent source of frustration for the industry. Neither rate has budged since implementation.

The government’s intelligence inputs painted a grimmer picture than tax policy debates usually warrant. Officials cited illicit activities spanning drug trafficking, human trafficking, money laundering, radicalization, and cyber fraud. They also flagged a large disparity between reported incomes and actual crypto trading activity, suggesting the compliance problem extends well beyond simple negligence.

One trend that caught the committee’s attention: investment capital flowing offshore. Indian traders, squeezed by the punitive tax regime at home, have increasingly turned to foreign platforms and exchanges, moving money outside the domestic regulatory perimeter entirely.

Enforcement actions and tax collections

India hasn’t been sitting idle on enforcement. The Financial Intelligence Unit of India, or FIU-IND, has registered 54 VDA service providers and imposed a cumulative penalty of ₹29 crore on several offshore platforms. KuCoin, Binance, Coinbase, and Bybit were among those penalized.

The crackdown has also involved blocking 63 URLs and taking down 85 platforms for compliance violations.

VDA tax collections rose from ₹269 crore in assessment year 2023-24 to ₹437 crore in AY 2024-25. TDS collections jumped from ₹220.82 crore to ₹364.62 crore over the same period. That’s a roughly 62% increase in tax revenue and a 65% jump in TDS collections year over year.

The committee is now evaluating India’s VDA regulatory framework against global standards. No specific tokens or projects were discussed during the deliberations.

The RBI factor

Looming over all of this is the Reserve Bank of India, which continues to express opposition to formal regulation of crypto assets. The central bank’s stance has been consistent for years: it would rather not legitimize a sector it views as fundamentally risky to financial stability.

The tax authorities are collecting hundreds of crores from crypto activity. The FIU is registering and penalizing exchanges. Parliament is holding committee reviews. But the central bank still doesn’t want to give the industry a formal regulatory home. Crypto is taxed but not fully regulated. Exchanges operate but without clear licensing frameworks.

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