MC EXCLUSIVE Crypto hawala racket on I-T radar: Dubai a key hub for illegal fund transfers

Data of crypto transactions from exchanges like Binance and WazirX is also under scrutiny by the I-T Department.

The Income Tax Department has, in recent months, carried out raids at multiple locations in several states, including Kerala, Tamil Nadu, and Karnataka to arrest individuals who are suspected of using cryptocurrency or virtual digital assets (VDAs) for the purpose of money laundering and transferring funds through illegal routes (hawala), three officials privy to the matter told Moneycontrol.

Sources say the individuals being probed in the recent raids have been using Dubai as their prime destination for converting the VDAs bought in India for hawala transactions. "The suspects typically maintain several bank accounts, over 500, and they use them to buy VDAs which are stored in their private digital crypto-wallets. These assets are subsequently converted to Dirhams, and then used for hawala transactions, " an official directly aware of the matter said.

In January, the I-T Department in Kerala had frozen bank accounts of 11 persons who carried out cryptocurrency transactions for evading tax with the support of a Kozhikode-based trading firm. As per reports, a Malappuram native was found to be the kingpin behind the illegal transactions of hawala money in the form of cryptocurrency to foreign accounts.

"Cryptocurrency is being increasingly used for hawala transactions. The Financial Intelligence Unit (FIU) and the I-T Department are working in coordination to track the masterminds," a senior I-T officer Pratap Singh told Moneycontrol. "The Common Reporting Standard (CRS) system helps Indian authorities garner financial transactions-linked data of individuals from Dubai, which helps in tracking the suspects," he explained.

The CRS is an international standard that allows countries to automatically exchange tax information, which helps authorities combat tax evasion and ensure transparency in financial transactions between countries. Governments and tax authorities gain access to data about financial accounts held by their citizens in other countries. This includes bank accounts, investment accounts, and even cryptocurrency platforms if they meet certain criteria.

Sources say individuals in Dubai are also converting Dirhams to VDAs and subsequently selling them in India at a higher rate. "The I-T Department is tracking these individuals as well," said another official. There are many high net worth individuals (HNIs) in the country who are involved in such illegal transactions, the person added.

Moreover, data of crypto transactions from exchanges like Binance and WazirX is also under scrutiny by the I-T Department.

Last week, sources from the Central Board of Direct Taxes (CBDT) told reporters that thousands of "high-risk persons" are being probed by I-T officials for tax evasion and laundering of unaccounted income through investment in crypto currency.

It is learnt that the CBDT has recently sent emails to thousands of defaulting persons to review their ITR and update if any income on account of VDA transactions have not been properly declared.

Sources say that data analytics has shown that a significant number of persons have violated provisions of the Income Tax Act by not filing the schedule for VDA under Income tax returns (ITR) and paying tax at lower rates than on the income earned or claiming cost indexation.

Section 115BBH of the I-T Act, 1961 prescribes a flat tax rate of 30 percent (plus applicable surcharge and cess) on income from VDA transfer. The provision does not allow deduction of any expenses except cost of acquisition. Also, loss from VDA investment or trading is not allowed to be set off against any other income or to be carried forward to subsequent years.

Tax experts say that when crypto assets move outside the centralised exchanges to peer-to-peer systems or private wallets, they become difficult to trace, enabling illicit activities like ransomware, money laundering, tax evasion and likely terrorist financing too. Traditional monitoring tools are often ineffective, highlighting the need for updated regulation and coordinated inter-agency action across the globe, they say.

Therefore, to mitigate these risks domestically, stronger enforcement of TDS provisions under Sections 194S and 195 of the Income-tax Act, 1961 is vital to ensure tax compliance in crypto transactions, noted Ashish Karundia, founder of CA firm Ashish Karundia & Co.

"Additionally, implementing Section 285BAA by defining reporting entities and standardising data submission will enhance transparency and tracking, thereby helping to curb illegal activities and also help secure government tax revenues simultaneously," he noted.