India’s crypto tax amendment could result in jail time for evaders

According to three lawyers, India has kept its rigorous crypto tax regulations from 2022 in 2023, while adding a potential punishment or jail sentence for non-compliance to the provision concerning tax deducted at source (TDS).

When presenting the nation’s budget on Wednesday, Finance Minister Nirmala Sitharaman avoided mentioning cryptocurrency, virtual or digital assets, blockchain, or central bank digital currencies, which reveals the most recent tax regulations. However, a modification to TDS regulations that affect virtual digital assets was concealed in the fine language (VDAs).

India implemented a 30% profit tax and 1% tax deducted at source (TDS) on all cryptocurrency transactions in 2022

The biggest democracy in the world imposed high taxes on cryptocurrency transactions last year: a 30% profit tax and a 1% TDS on all transactions. The 1% TDS is still in place, but up until this point, there was no legal provision that enforced a fine for noncompliance if a citizen attempted to avoid paying the tax or made an incomplete payment.

A retailer could contend in court that no punishment is required, only having to pay tax. Now, failure to comply could result in a fine equal to the tax debt and/or a prison sentence of 3 to 84 months.

According to cryptocurrency tax advisor Anoush Bhasin, who is also the founder of Quagmire Consulting, the amendment calls for a fine and probable jail for at least three months and possibly up to seven years.

This is specific to crypto-to-crypto transactions, according to Sandeep Jhunjhunwala, a partner at Nangia-Andersen LLP, who also stated that the measure wants to “amend the punishment and prosecution provisions.”

“Penal provisions” call for fines and jail for a minimum of three months and a maximum of seven years, along with a penalty equivalent to the TDS deduction, the official said.

The clause still needs to be adopted by the Indian Parliament in order to become law, but given that Prime Minister Narendra Modi’s party now controls both chambers of the legislature, this appears plausible. The clause would become operative on April 1.

Indians moved more than $3.8 billion in trading volume from local to overseas crypto exchanges in the nine months following the announcement of the tax regulations on cryptocurrencies. The “secret” shift is anticipated to target foreign exchange-using retailers.

Rajat Mittal, a crypto tax attorney at India’s Supreme Court, stated that Indian sellers who are on overseas platforms typically use P2P mechanisms to buy and sell cryptocurrency. “A vendor who is in charge of paying a buyer using a P2P platform is required to deduct TDS. Users who don’t deduct TDS now risk having their TDS liability increased to 100%, as well as a possible sentence of 3 to 84 months in prison.”

The crypto community may still benefit from this, though, as it would encourage retailers to use their local exchanges again. Co-founder of the Indian cryptocurrency investment app CoinSwitch Kuber, Ashish Singhal, says that:

There has never been a fine for not deducting. Now that Budget 2023 has been developed. This means that you shouldn’t use offshore or non-compliant platforms to avoid TDS. According to Section 271C of the Income Tax Act, you can face penalties. Use a platform that complies with tax laws if you are investing in cryptocurrency.

Alternately, the penalty added to the law in 2023 may serve to further deter cryptocurrency dealers after the laws are implemented in 2022. The industry had expected the year would bring on a “period of pain” at the time.

Even if there were other macroeconomic reasons that played a role, this turned out to be ostensibly correct. Almost immediately, the amount of cryptocurrency trading fell and public interest in the currency fell.

According to a story published earlier this week, a number of those closely involved in the regulation of cryptocurrencies have previously expressed publicly their desire for a tax cut while privately believing it was impossible. The industry’s top demand and the consensus among policy think tanks was to lower the TDS to 0.01%, or at the very least, 0.1%.

According to Rajagopal Menon, Vice President of Indian cryptocurrency exchange WazirX, “Indian crypto companies are on the staircase to paradise” because there have been no changes to the current crypto taxation. “We hope the government would reevaluate its stance on cryptocurrency taxes.”

Although this was “not good for our country and those building in this sector in India,” said Sumit Gupta, co-founder of CoinDCX, another Indian exchange, he remained “dedicated to cooperating with the government to devise rules that are conducive to the sustainable growth of the ecosystem.”

Since the beginning of last year, India has put a cryptocurrency bill in limbo, claiming that global coordination is essential for the success of crypto legislation and is a top priority given its influence over setting the agenda as the G-20 presidency. Requests for comments from the Finance Ministry were not promptly fulfilled.

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