The current regulatory posture concerning virtual digital assets (“VDAs”) in India presents a significant legal paradox: the assets remain explicitly “unregulated” by comprehensive legislation, yet transactions involving them are subjected to highly aggressive monitoring and rigorous enforcement under existing statutory frameworks. Recent disclosures by the government indicate a decisive shift toward enforcement-led supervision, establishing a de facto regulatory regime through tax compliance and anti-money laundering (AML) mechanisms.
The Enforcement-Centric Regulatory Architecture
The government’s strategy is defined by the coordinated application of multiple statutory vectors, effectively treating VDAs as technology-neutral assets subject to traditional financial crime and tax controls.
Tax Enforcement and Monitoring: The Central Board of Direct Taxes (CBDT) had integrated VDAs into the Income Tax Act, 1961, through the Finance Act 2022.
Enforcement data underscores the effectiveness of this structure. The CBDT has detected ₹888.82 crore in undisclosed VDA income during search and seizure operations, signaling sophisticated monitoring capabilities. Moreover, over 44,000 compliance communications have been issued under the NUDGE campaign (Non-Intrusive Usage of Data to Guide and Enable), employing data analytics tools like Project Insight to cross-reference VASP-reported TDS returns with taxpayer Income Tax Returns (ITRs). Non-declaration of VDA activities in Schedule VDA of ITR forms is treated as undisclosed income, subject to severe penalties that can reach up to 60% plus surcharge.
Anti-Money Laundering (AML) Mechanism: The Prevention of Money Laundering Act (PMLA) framework has become the primary tool for enforcement against illicit flows. Following the March 2023 Ministry of Finance notification, Virtual Asset Service Providers (VASPs) were designated as reporting entities. They are obligated to register with the Financial Intelligence Unit-India (FIU-IND) and submit specified and suspicious transaction reports.
The Enforcement Directorate’s (ED) actions demonstrate aggressive application of the PMLA: attachments, seizures, or freezing of VDA-linked proceeds amount to ₹4,189.89 crore across multiple cases. This enforcement action has resulted in 29 arrests, 22 prosecution complaints, and one declaration of a fugitive economic offender. Crucially, offshore VASP platforms operating without registration have received non-compliance notices, invoking both PMLA Section 13 penalties and directions for platform takedown under the Information Technology Act, 2000, asserting jurisdictional reach.
Layered Statutory Reach: India’s broader anti-evasion matrix applies extraterritorially to VDAs held abroad through the Benami Transactions (Prohibition) Act, 1988, and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. These laws enable authorities to characterize VDA transfers as undisclosed assets or benami holdings, allowing prosecutorial discretion to select among multiple statutory grounds for asset seizure, decoupling enforcement outcomes from singular statutory interpretations.
Strategic Implications and Compliance Burden
The enforcement-first approach places a substantial compliance burden on all market participants. The convergence of tax and AML enforcement creates dual exposure, where tax adjustments may be concurrent with PMLA investigations and potential criminal prosecution for the same transaction set.
For investors, the mandate for meticulous record-keeping is non-negotiable. This includes documenting every trade, acquisition cost, wallet address, and exchange statement to withstand scrutiny under multiple statutory provisions. The technological capabilities of the enforcement agencies, including the integration of on-chain analytics and specialized training in blockchain forensics, mean that non-reporting is increasingly untenable, as authorities can match VASP-filed data against ITRs to create a direct audit trail.
VASPs must prioritize robust Know Your Customer (KYC)/AML procedures and fortify internal controls for FIU-IND submissions. Their compliance failure is often the gateway for state scrutiny of individual taxpayer activity.
Global Context and Foreseeable Trajectory
The government explicitly justifies the lack of comprehensive domestic legislation by citing the inherently borderless nature of blockchain assets, arguing that effective regulation requires global consensus on taxonomy standardization and risk evaluation to prevent regulatory arbitrage. This positions India within the global trend toward harmonization, aligning with Financial Action Task Force (FATF) recommendations on VASP reporting and risk-based AML. Globally, jurisdictions are accelerating VASP licensing (e.g., EU’s MiCA framework) and implementing the FATF Travel Rule for data sharing.
Conclusion
India’s VDA ecosystem is currently defined by regulatory policy design that is simultaneously non-existent and intensely controlling. The significant figures detected in undisclosed income and attached proceeds of crime serve as a clear warning: the regulatory vacuum is being decisively closed through action, not just legislation.
Organizations operating in this space must prioritize operational transparency, implement robust KYC/AML infrastructure, and maintain comprehensive transaction documentation to navigate the overlapping PMLA, income tax, and benami law provisions. Long-term strategy requires monitoring global developments, as international standards will inevitably influence the evolution of India’s foundational enforcement architecture into integrated regulation.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
