Indian Regulator Requests $86M Tax from Binance
Shortly after receiving approval from the local anti-money laundering watchdog, Binance is now haunted by another regulator. Other global crypto exchanges might face the same charges.
Binance recently received an $86 million tax show cause notice from India's Directorate General of Goods and Services Tax Intelligence (DGGI) unit in Ahmedabad. This is the Indian regulator's first formal step when it suspects a violation of tax rules.
Binance allegedly collected fees from Indian customers from July 2017 to March 2024 and did not register or make local Goods and Services Tax payments. The exchange activity, if classified as online information database access or retrieval (OIDAR) services, is subject to an 18% tax. The tax applies to both providers located in and outside India.
According to The Economic Times, Binance appointed a local counsel in India to communicate with the DGGI on the matter. A company spokesperson claimed that Binance is fully cooperating with the Indian tax authorities, but some sources have revealed the company has challenged the notice.
This is the first time the regulator has issued such a notice to a global cryptocurrency company. A couple of years ago, DGGI inspected local exchanges and recovered a significant amount of taxes. Since then, we haven’t heard much from them until last week, when the regulator sent a notice to Infosys, alleging that the second-largest Indian IT company avoided paying $3.9 billion of GST. Infosys also challenged the notice, and the agency, for now, dropped part of the allegations.
The 2023 amendments have redefined OIDAR services, bringing more services into the category. Unlike before, services delivered over the Internet or electronic networks can involve some level of human interaction.
We expect that if the trend continues, other global IT and crypto players, such as Kraken, might soon face the same charges.
Indian regulators apparently see the crypto industry as a great source of income. In 2022, India introduced harsh taxes on crypto - a 30% tax on crypto income and a 1% tax deducted at source on each crypto transaction - which eventually led to the exodus of users, funds, and trades to offshore platforms. In effect, the regulators kicked almost all the global players out of the country.
The Indian Ministry of Finance stated that all Virtual Digital Assets Service Providers, including offshore crypto exchanges, should register with India's Financial Intelligence Unit (FIU), conduct relevant KYC procedures, and comply with other provisions of the Prevention of Money Laundering Act. At the end of 2023, the FIU issued notices of ‘operating illegally’ to nine offshore crypto exchanges, including Binance, KuCoin, Bitfinex, MEXC, and Kraken and banned all of them in January 2024. This led to a slight inflow of funds to local exchanges - and allegedly, thus, to the budget.
The ice has melted somewhat with KuCoin's re-entry to India. The company announced successful registration with the FIU in March 2024, becoming the first global crypto exchange to get clearance from the anti-money laundering watchdog. The regulator also approved Binance, conditional to paying a penalty, which was set at $2.2 million at the end of June. The DGGI's investigation is apparently independent from the FIU.
While India is the indisputable leader in crypto adoption, according to Chainalysis, in our opinion the local regulators’ efforts don’t support industry development. Either the regulators simply want to take as much money as possible, or they really want to create a safe and regulated environment but continue - unwittingly or not - to hinder those efforts. But one fact remains clear: if the regulators, one after another, continue to come after exchanges, the strategy could result complete loss of profits through taxation.
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