Can India’s Controversial New Tax Law Be Challenged in Court? Yes, Say Crypto Lawyers

While the overall bill may not be suitable for a lawsuit, lawyers believe a 1% tax deducted at source may be.

AccessTimeIconApr 5, 2022 at 4:17 a.m. UTC
Updated May 11, 2023 at 6:18 p.m. UTC

India’s top legal experts say the crypto community would have a “fair chance” if they made a legal challenge to a 1% tax deducted at source enshrined in a new crypto tax law.

On Wednesday, the Indian government’s crypto tax legislation received the assent of the President of India, the final formality before becoming law.

The crypto tax law enforces a 30% tax on profits from crypto transactions, effective April 1. Traders will not be able to set off losses from other crypto transactions. Crypto gifts within a family would be exempt, but gifts above Rs. 50,000 ($660) outside the family would be taxable once in the hands of recipients.

The most controversial provision – the 1% tax deducted at source (TDS) liability – won’t take effect until July 1.

TDS is a liability enforced against the exchanges that deposit tax on behalf of sellers on the platform. It will be calculated at 1% of transaction value. The seller would be able to set off this 1% TDS from their total tax liability of 30%. The TDS mechanism is used to trace transactions and prevent tax evasion, according to the government.

Several crypto lawyers told CoinDesk they believed challenging the crypto tax legislation as a whole (both 30% tax on profits and 1% TDS) would be a “bad move.”

They struck a different tone when discussing a legal challenge to just the 1% TDS.

Legal precedent

Two law firms – Nishith Desai Associates and Ikigai Law – challenged a previous move by a government-adjacent institution.

The Reserve Bank of India (RBI), the nation’s central bank, issued a circular that effectively prevented banks from providing services to crypto exchanges in 2018. The nation's Supreme Court struck down the RBI circular in March 2020, in a clear victory for the crypto community.

In the RBI case, Nishith Desai Associates represented the Internet and Mobile Association of India, an industry body that manages policy on behalf of crypto businesses collectively. Its lawyers declined to comment on the pros and cons of a legal challenge to the new crypto tax law.

Ikigai Law was the firm that represented crypto exchanges in the RBI case. Its founder and managing partner, Anirudh Rastogi, told CoinDesk he believed “there was a good case to be made” against the new crypto tax law.

“Approaching the courts might just be the only recourse … especially regarding TDS, more than the tax rate itself. The TDS rate and provision is arbitrary and will severely impact operations. On the TDS, I do believe there is a solid case to be made and that’s something we have looked at,” Rastogi said.

The Goa-based lawyer confirmed that his firm had explored approaching the Supreme Court to challenge the 1% TDS provision in the new crypto tax law but said no one from the crypto industry had approached him.

"The 1% TDS is going to suck out liquidity from the system entirely, which means exchanges can't really operate. It also doesn't serve the government's objective of essentially increasing the tax base,” Rastogi said.

The provisions may be challenged for violating the fundamental right enshrined in the constitution of the Right To Trade or Article 19(1)(g) which states that “All citizens shall have the right to practise any profession, or to carry on any occupation, trade or business,” he said.

Both Rastogi and representatives of Nishith Desai Associates did not comment on the possibility of a legal challenge to the 30% tax on profits.

Other legal opinions

Rashmi Deshpande, an independent lawyer with a history of crypto related cases believes the legal strategy to approach the Supreme Court is critical.

“If you strictly talk about legal precedence and principles, this (challenging all crypto taxes as a whole) is not a good case to be challenged in the Supreme Court. Right now, crypto businesses should keep dialogue open with the government. Only dialogue can soften the government’s strict stand,” Deshpande said.

However, challenging the 1% TDS specifically is a different ball game altogether.

She said “the 1% TDS can be challenged as an inefficient mechanism to recover tax.”

Rajat Mittal, a tax counsel in India's Supreme Court advising crypto businesses, said “the Supreme Court is unlikely to interfere in a challenge to imposition of the 30% tax since the government’s policy decisions are not subject to judicial review.”

He believed whatever legal challenge is posed should be to the High Courts (which are the highest appellate courts in India), particularly the TDS provision.

“TDS can be challenged since it will be fatal to the existence of centralized exchanges, as users will migrate to other non-KYC [know your client] exchanges which would be termed differential treatment,” he said.

For Mittal, the grounds to challenge the 1% TDS rule could be that it “literally puts exchanges out of business." He cited the same provision of the Indian constitution as Rastogi, saying that it gives freedom to trade and on the grounds of violating Article 14 that provides for equal treatment “since Indian exchanges will lose out to non-KYC and foreign exchanges that customers will prefer because of the 1% TDS.”

Vijayendra Pratap Singh, partner at AZB & Partners, a prominent firm on financial matters, said tax laws cannot be stayed by interim orders without special circumstances.

“If one cannot stay the law, the same will be enforced. Hence, people will have to start paying the taxes and settling the trades after deducting tax at source,” Singh said.

Crypto community exploring legal recourse

CoinDesk earlier reported that several industry leaders who did not wish to be named said the option of challenging the 1% TDS provision and the 30% tax on profits in the Supreme Court had been discussed.

“If such an option exists, it is the last nuclear approach,” Nischal Shetty of WazirX, India’s biggest exchange by volume, previously told CoinDesk.

An industry insider who asked not to be identified because the discussions are private said that exchanges are waiting for the industry body, the Internet & Mobile Association of India (IAMAI), to make a decision on a legal challenge to the tax law.

So far, India’s crypto community and the industry have expressed outrage, but concrete reactions to the crypto tax law are awaited.

Online campaigns titled #ReduceCyptoTaxes and #UnfairCryptoTax have been dominating the crypto conversation on social media. Opposition members of Parliament who have slammed the government for its policy with speeches in Parliament have been celebrated.

Predictions about an accentuated exodus of the crypto industry have declared that “India will see the biggest brain drain in history in the next eight to 12 months” because the new rules “wrap the industry in shackles'' resulting in ”potential entrepreneurs” moving “out of the country,” said Sidharth Sogani, founder and CEO of cryptocurrency research organization Crebaco.

WazirX’s Shetty had told CoinDesk that it would take at least a month to see the true impact of the crypto taxes.

‘Wait for indirect taxes’

Apart from waiting to see the true impact of these taxes on the industry, legal exports believe crypto businesses should wait for indirect or GST (Goods and Services Tax) rates to be announced.

GST is an indirect tax that replaced many other indirect taxes in India, such as the excise duty, value-added tax, services tax and others, in 2017.

While direct tax proposals become law through Parliament, India has a different rule-making process for indirect taxes. Such tax legislation is made by the GST council, which follows the ideals of federalism in which different states and the central government frame policies together. The council consists of finance ministers from the central government and all states.

Reports suggest that the GST authorities are in the process of framing crypto tax policies and are of the opinion that crypto should be taxed at 28%, the highest tax slab meant for luxury goods, such as luxury cars, or speculative activities, including betting, gambling or horse racing.

Deshpande believes the industry “should patiently wait for GST rates to be announced and then rethink the litigation strategy.”

“There is no point filing a writ petition in the Supreme Court that may agitate the GST council to the extent that they charge you the highest rate of 28%,” she said.

AZB’s Singh also believed that “since 11 exchanges have faced tax inspections recently, it shows increased attention from tax authorities for any evasion.”

“Hence, the writing is on the wall of what could happen is increased focus on tax compliance. Therefore, it would be prudent to come up with a legal strategy which looks at compliance alongside the challenge,” he said.

CORRECTION (April 5, 2022, 4:15 UTC): Corrects paragraph above "Other legal opinions" subhead to say Rastogi and representatives of Nishith Desai Associates did not comment on the possibility of a legal challenge to the 30% tax on profits.


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Amitoj Singh

Amitoj Singh is a CoinDesk reporter.