USDT Arbitrage | USDT INR | FEMA | Crypto | P2P Trading | Send Money Abroad | © CA Mitesh and Associates

Why crypto traders are receiving FEMA notices?

Why crypto traders are receiving FEMA notices?

Many Crypto Traders engaged in USDT Arbitrage Trading are receiving FEMA notices. Many of these traders are receiving notices for transactions done back in FY 2017-18. And in all the cases these traders had used LRS scheme to transfer money overseas. Lets go over each aspect to understand what is Crypto Arbitrage Trading and why these traders are receiving FEMA notices.

First of all,

What is FEMA?

FEMA stands for Foreign Exchange Management Act, a law passed by the Indian government in 1999 to regulate foreign exchange transactions in India. Under FEMA, payments made to any person outside India or receipts from them, along with forex deals and foreign security are restricted. The objective of the Act is to facilitate external trade and payments and for promoting the orderly development and maintenance of the forex market in India

What is LRS?

LRS stands for Liberalised Remittance Scheme, In 2004, RBI introduced Liberalised Remittance Scheme ('LRS'), allowing Indian residents to freely remit up to $250,000 US Dollars per financial year for current or capital account transactions or a combination of both. Any remittance exceeding this limit requires prior permission from the RBI.

What types of transactions are permitted under LRS?

Capital account transactions:

1) Opening of foreign currency account abroad with a bank;
2) Acquisition of immovable property abroad, overseas direct investment (ODI) and overseas portfolio investment (OPI), in accordance with the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022;
3) Extending loans, including loans in Indian Rupees to non-resident Indians (NRIs) who are relatives as defined in the Companies Act, 2013.

Current account transactions:

1) Private visits abroad (excluding Nepal and Bhutan)
2) Gifts/donations
3) Going abroad on employment
4) Emigration
5) Maintenance of relatives abroad
6) Business trips
7) Medical treatment abroad
8) Pursuing studies abroad

What is USDT Arbitrage India?

It's basically an Arbitrage opportunity wherein you buy USDT cheaply on overseas exchanges like Binance (most popular among traders), Bittrex, etc. The same USDT is usually selling at premium on the Indian crypto exchanges such as WazirXCoinDCX, or via P2P platforms like Binance P2P. So you transfer USDT from your overseas exchanges to your Indian crypto exchange's wallet. Once USDT becomes available in your Indian crypto exchange wallet, you sell it at a premium on the Indian crypto exchange via P2P or to the Indian crypto exchange itself. This whole process is known as USDT Arbitrage India. Please be aware of the One Percent TDS deduction rule now applicable.

Lets dive into

Step by Step USDT Arbitrage India process:

Step 1. Transfer INR via wire transfer to an Overseas Exchange (like Binance)
Step 2. Buy USDT on that Overseas Exchange (in our case - Binance)
Step 3. Confirm USDT selling at premium in India
Step 4. Transfer USDT to your Indian crypto exchange wallet
Step 5. Sell it at a premium on the Indian crypto exchange


USDT Arbitrage | USDT INR | Crypto | P2P Trading | Send Money Abroad | © CA Mitesh and Associates

So Why are the Crypto Traders are receiving FEMA notices?

Remember how we said that you can transfer INR via banking channels under Liberalised Remittance Scheme up to $250,000 US Dollars per financial year. Each time that you transfer money overseas you have to provide a PURPOSE CODE. 

Purpose code is a code issued by RBI that is required for successful cross-border transactions. This code is mandatory and it is assigned to every transaction and states the purpose for which the transaction is being made. We have listed the Capital account and Current account transactions that are allowed above. 

These codes specify the nature of the transaction as well as the specific reason for the transfer. The RBI can classify remittances using these codes. For example, if the purpose of your foreign transaction is 'GIFT' you must use the code S1302 when processing the transfer.

All these Crypto Traders that are receiving FEMA notices have misused these purpose codes and transferred huge sums of money overseas. Now it has become nearly impossible for them to provide an explanation for such blatant misuse the LRS scheme.

What Happens When You Choose the Wrong Purpose Code?

As stated earlier, purpose codes are mandatory for remittances. If you select the incorrect purpose code, Bank and RBI may flag the transactions as an attempt to evade taxes. Wrong purpose codes can also cause your transactions to fail. Furthermore, the bank may suspend the amount on charges of tax evasion and report these transactions to income tax department. If you select the wrong purpose code, you will be unable to change it for previous transactions. 

Even Crypto Exchanges are under scrutiny for FEMA violations

The Enforcement Directorate (ED) had raided the premises of one of the directors of Zanmai Labs Private Limited, which owns the WazirX crypto exchange, on charges of violating the FEMA Act and froze its bank balances worth Rs 64.67 crore

Transaction history, relationship with foreign exchanges, how much money is going out of India - ED is examining every detail on offshore transactions. Information has been sought from the exchanges and in certain cases their executives are also under scrutiny. These exchanges are also under scrutiny over the alleged misuse of cryptos, especially in trade-based money laundering (TBML).

Recently they found instances of use of hawala and crypto in TBML. This hawala route using crypto is very opaque structure making it extremely difficult to find both the source and the beneficiary.


If you are a Crypto Trader or Investor and want to benefit from the Arbitrage opportunities involving USDT, BNB then it is important that you understand the financial, legal & tax provisions to avoid mistakes. We have been helping our clients who are big time traders/investors navigate the laws successfully without taking unnecessary risks.

Please schedule a consultation to discuss with us about your accounting and taxation needs on Cryptocurrency Trading and Arbitrage