New Delhi: India’s taxation framework for virtual digital assets (VDAs) was introduced to improve transaction transparency and ensure that crypto-related income contributes to the tax base. Section 393(1) of the Income-tax Act, 2025, mandates 1% tax deducted at source (TDS) on consideration paid for the transfer of VDAs, subject to prescribed conditions and thresholds. However, the effectiveness of this mechanism depends on identifying the person responsible for deducting tax and tracing the payments that trigger the obligation across different trading arrangements.
Peer-to-peer (P2P) transactions expose a significant implementation challenge. Unlike conventional exchange transactions, where platforms manage trading, settlement and transaction records, P2P platforms primarily connect buyers and sellers, who settle payments directly. For instance, an Indian resident purchasing VDAs through an offshore platform may transfer rupees directly to the seller’s bank account, while the platform facilitates the transfer of the digital asset through an escrow mechanism. Although the platform may have visibility into the transaction, it may not exercise control over the payment itself.
This separation complicates the identification of the person responsible for deducting TDS. Where the buyer, seller and platform perform different functions, determining responsibility and ensuring compliance can become operationally difficult.
Offshore platforms add another layer of complexity. Their operations, records and corporate structures may be distributed across jurisdictions, making information gathering and enforcement more challenging. Three factors are particularly relevant: the separation of trading and payment functions, cross-border enforcement difficulties, and fragmented transaction reporting. When the platform, counterparties and banking institutions hold different parts of the transaction record, reconciling VDA transfers with corresponding payments and TDS deductions becomes more difficult.
The resulting asymmetry between domestic and offshore platforms is not necessarily a question of legal exemption. The law places the obligation on the person responsible for making the payment, rather than automatically on the exchange. Offshore platforms and P2P transactions are not automatically exempt from Indian tax obligations. Rather, the challenge lies in differences in how compliance is implemented and verified. If users perceive offshore or P2P arrangements as involving fewer immediate compliance requirements, trading activity may migrate towards these channels, potentially disadvantaging domestic platforms that invest in tax deduction and reporting infrastructure.
The implications extend beyond revenue collection. Incomplete transaction reporting can weaken tax authorities’ ability to verify compliance, reduce market transparency and complicate consumer dispute resolution. It can also distort competition when comparable economic activities face different levels of effective oversight.
Addressing these challenges requires better implementation rather than necessarily introducing an entirely new tax. First, the government should clarify the application of Section 393(1) across exchange-facilitated trades, P2P transactions, escrow arrangements and offshore intermediaries. Guidance should establish when the obligation rests with the payer and when an intermediary may be responsible, consistent with the statutory language.
Second, transaction-level reporting should be strengthened to help reconcile VDA transfers, fiat payments and TDS deductions. Requirements should reflect an intermediary’s actual role and access to information, while avoiding unnecessary duplication. Third, India should assess whether existing international information-exchange arrangements and cross-border cooperation mechanisms adequately address transactions facilitated by offshore platforms. Finally, regulatory parity should be pursued through a coherent application of existing obligations, taking into account different business models and jurisdictional connections.
Ultimately, the P2P challenge illustrates a broader limitation in India’s VDA tax framework: the effectiveness of taxation depends not only on the law itself but also on the ability to identify responsible parties, trace payments and enforce compliance across jurisdictions.
The objective should not be to penalise P2P transactions simply because they operate across borders or use different settlement structures. It is to ensure that a rupee traded offshore carries the same obligations and the same protections as a rupee traded at home. That requires closing the distance between what the law requires and what the system can verify. India must therefore close the gap between legal obligations and their practical enforcement.
