Regulatory Arbitrage in Reverse: Why CARF Cannot Achieve Tax Transparency in India's Crypto Ecosystem

[Adarsh and Sunniva are students at Gujarat National Law University.]

The G-20 declared the end of bank secrecy in 2009. Within a few years, the Organisation for Economic Co-operation and Development’s Common Reporting Standards were adopted reciprocally by 117 jurisdictions, including India, measurably raising the cost and risk of offshore tax evasion. However, crypto-assets, unlike traditional assets, do not abide by the same rules, prompting the development of the Crypto-Asset Reporting Framework (CARF). CARF requires service providers, including exchange platforms, wallet providers, and brokers, to collect and report transaction data for exchange between participating jurisdictions. 

India ranked the highest for crypto adoption rate for 3 consecutive years in the Chainalysis Global Crypto Adoption Index. The need to regulate this market, valued at USD 3.04 billion, prompted legislative intervention through the Finance Act 2022. However, this legal response was shaped more by a punitive tax architecture than by calibrated market realities, triggering a behavioural shift of users that predates CARF by 5 years as a pre-emptive response to this regime. This article argues that this shift towards offshore platforms, peer-to-peer, and decentralised exchanges has undermined CARF's implementation in India, limiting its capacity to generate meaningful tax transparency and reporting.

India's Crypto Taxation Architecture and Its Structural Consequences

India has one of the world’s most stringent taxation frameworks for virtual digital assets. The Finance Act 2022 inserted Sections 115BBH and 194S into the Income Tax Act 1961, establishing this tax regime. Under Section 115BBH, a flat 30% capital gains tax was introduced, with no distinction between short and long-term gains, thereby rendering the holding period irrelevant. Section 194S additionally mandates a 1% tax deducted at source (TDS) on every transaction exceeding INR 10,000 in a financial year (INR 50,000 for specified persons). Since this levy applies to gross transaction value rather than net profit, it causes significant liquidity drain per trade. For a trader executing ten trades of INR 1,00,000 each per day, INR 10,000 is locked up before any profit is realised, undermining fundamental operational logic in a market that moves minute by minute.

Yet, the regime failed to generate commensurate revenue. The principal reason is the documented behavioural migration away from domestic crypto platforms to avoid tax obligations under the new regime. Following the 1% TDS, India’s VDA exchange volumes fell by 81% within 4 months, while over 90% of VDA trading between July 2022 and July 2023 shifted offshore, amounting to INR 4,87,799 crore in trade volume and an estimated INR 4,877 crore in uncollected TDS since October 2024. The result is a revenue paradox: the tax regime incentivised the very behaviour it sought to prevent, thereby reducing revenue collection.

Financial Intelligence Unit – India issued non-compliance notices to 34 (9+25) offshore VDA service providers between 2023 and 2025 under the Prevention of Money Laundering Act 2002, implicitly aimed at restricting these platforms’ operations in India. Yet, web traffic to these 9 platforms rose by 57%, while traffic to Indian platforms declined by 34%, reinforcing the existence of the migration of users offshore.

India's Diminished RCASP Pool: A Structural Impediment to CARF's Efficacy

The crypto ecosystem rests on pseudonymity, meaning owners cannot be identified by name on the blockchain, and disintermediation, as users can transfer crypto without intermediaries like banks. CARF counters disintermediation through third-party reporting, attempting to increase compliance.

Section IV(B)(1) defines reporting crypto-asset service providers (RCASPs) as any individual or entity providing services to effectuate exchange transactions on behalf of consumers, including being a counterparty or intermediary or providing a trading platform. The entire framework establishes reporting obligations on these RCASPs. India has 49 VDA service providers, including 4 offshore providers, whereas the European Union (EU) hosts hundreds of licensed providers across 27 countries under the Eighth Directive on Administrative Cooperation. These entities have a compliance and reporting culture, having built on internal due diligence, KYC workflows, and structured data-transmission infrastructure,  mandating annual reporting of taxpayers' information to competent authorities. This disparity is not merely quantitative. Unlike India, the EU never witnessed a comparable user migration, which, under CARF, translates to a larger capturable base, as most users are on domestically regulated platforms. Furthermore, any reporting obligation on India’s unregistered RCASPs that are employed by users solely to evade taxation will aggravate the user migration. Consequently, the majority of transactions will be beyond the reporting net of CARF, while the users continue relying on alternative mechanisms.

Loopholes in CARF's Reporting Obligations

CARF's design rests on two assumptions: that users prefer the convenience that RCASPs offer, and that alternatives are complex enough to attract only technically well-versed users. CARF's implementation in India fails on both.

Section IV(B)(1) defines RCASP, mandates reporting only for services operated as a business and does not apply when one sells software or any application not used to provide services to effectuate an exchange. This means that selling software as a product instead of services would keep it beyond CARF’s scope. Further, CARF commentaries argue that a platform enabling users to list, buy, sell, or convert crypto-assets does not trigger compliance. This exemption causes significant non-reporting as users on self-hosted wallets can trade using these platforms. This low-hanging-fruit approach, which caters to easy-to-regulate custodial wallets managed by third-party services on behalf of users and RCASPs, excludes self-hosted and peer-to-peer trading.

Peer-to-peer trading, the direct exchange of digital assets between individuals without an intermediary, accounts for a substantial share of exchange volume, so its exclusion will leave a larger fraction of exchanges unreported. Taxes like TDS continue to apply to trades where there are no intermediaries, but there is no one to absorb compliance responsibilities. The law still treats the failure to deduct TDS seriously, with buyers being treated as an “assessee in default” facing interest penalties of 1% per month for non-deduction and 1.5% per month for non-deposit. The irony is that although the law technically applies here, enforcement is not feasible at this scale. Exclusion by CARF simply formalises this already existing legal vacuum in India.

Alongside P2P trading, a vast cohort uses decentralised crypto exchanges (DEXs), which enable crypto-asset trades between users entirely through automated algorithms (smart contracts). It functions on a similar structure to that of a centralised exchange but without a central intermediary. However, its inclusion in CARF hinges on whether individuals or entities can be identified who exercise sufficient control or influence over the platform. CARF deploys the Financial Action Task Force guidance in this regard, which acknowledges that there is no obligation in situations where no person has control or influence, making RCASP obligations inapplicable. Moreover, there is no specific parameter or threshold for evaluating such control. If a DEX operates as a community-based open-source project without commercial motives and has no identifiable link to any individual or entity, it will not give rise to RCASP status.

Additionally, RCASPs have reporting obligations only when they have nexus to the CARF-implementing jurisdiction. Most offshore platforms are therefore likely to adopt decentralised structures without nexus or personal control, evading CARF. Since most platforms' objective is to evade taxation, their first response will be to design or reformulate around non-compliance as an immutable feature. Users, having already climbed the learning curve, have every incentive to migrate further to non-nexus structures. CARF's implementation will not reduce offshore transactions, but rather make them more sophisticated. Since each jurisdiction must transpose CARF individually, implementation will likely stay uneven, undermining its goal of uniform reporting and creating loopholes platforms can exploit.

The Pre-Adaptation Problem: A Market Already Beyond Reach

All the transactions that CARF is designed to capture no longer exist in India. The market is already adapted to avoid detection, as CARF works only if the taxable activities remain on exchange and customers report ownership. Both these conditions are fragile in the Indian market. One possible counterargument is that “even if CARF captures only marginal activity, it is still better than nothing.”

In response, it must be considered that this will disrupt the equilibrium by penalising the compliant users and causing further migration because the differential between compliant and non-compliant costs increases with each enforcement action, making defection increasingly rational. Additionally, the CARF reporting obligation will eliminate non-KYC transactions by RCASPs, causing anonymity-conscious users to shift to alternatives, although they will lose the convenience offered by centralised exchanges; however, the majority will not accord it the necessary priority. The net effect is not partial compliance; it is the systematic destruction of the domestic compliant base.

Hence, the migration needs to be addressed through the lens of the structural incentives driving it. The TDS and capital gains tax call for expeditious reformulation to address this migration. India's transposition of CARF domestically must adopt supplementary reporting obligations for unhosted wallet transfers that go beyond baseline requirements, like wallet ownership verification before executing a transfer. Such transfers could be modelled on the EU’s Transfer of Funds Regulation to enhance due diligence requirements. While CARF's adoption represents a meaningful step globally, the structural misalignment with India's unique market positioning endangers the entire framework's promise of tax transparency and must be addressed.