India's Crypto Tax Amendment Could Punish Evaders With Jail Time, Attorneys Say

In 2022 India instituted a 30% tax on profits and a 1% tax deducted at source (TDS) on all transactions for the crypto sector.

AccessTimeIconFeb 1, 2023 at 7:02 a.m. UTC
Updated Feb 2, 2023 at 1:41 p.m. UTC

India has maintained its restrictive crypto tax rules from 2022 in 2023, while adding a potential fine or jail time for non-compliance to the provision around tax deducted at source (TDS), according to three attorneys speaking to CoinDesk.

Finance Minister Nirmala Sitharaman did not mention crypto, virtual or digital assets, blockchain or central bank digital currencies on Wednesday while unveiling the nation’s 2023 budget, which indicates the latest tax rules. But hidden in the fine print was a change to TDS rules that affects virtual digital assets (VDA).

Last year, the world's largest democracy instituted stiff taxes on crypto transactions: a 30% tax on profits and a 1% TDS on all transactions.

The 1% TDS remains but until now no provision in the law imposed a penalty for failure to comply, if a citizen tried to evade paying the tax or made an incomplete payment. A retailer could argue in court that no penalty is prescribed, getting away with just tax liability. Now a fine equivalent to the tax liability and/or jail time of 3 to 84 months could be imposed in case of non-compliance.

The amendment proposes a fine and possible imprisonment for at least three months and possibly up to seven years, said crypto tax adviser Anoush Bhasin, who is also a founder of Quagmire Consulting.

Sandeep Jhunjhunwala, a partner at Nangia-Andersen LLP, explained that this was specific to crypto to crypto transactions, saying the bill seeks to "amend the penalty and prosecution provisions."

"Penal provisions entail a penalty equal to the amount of TDS deductible and prosecution with rigorous imprisonment for a term not less than three months and which may extend to seven years with fine," he said.

India's Parliament still has to adopt the provision and enact it into law, but given Prime Minister Narendra Modi's party controls both houses of the legislative body, this seems likely. The provision would take effect on April 1.

In the nine months after the tax rules on crypto were announced, Indians moved more than $3.8 billion in trading volume from local to international crypto exchanges. The "hidden" change is expected to target retailers using foreign exchanges.

"Indian retailers who are on foreign platforms usually use [peer-to-peer] mechanism to buy and sell crypto," said Rajat Mittal, a crypto tax lawyer at India's Supreme Court. "A retailer who is responsible for making payment to a buyer on P2P platform is liable to deduct TDS. If users don't deduct TDS now they could be made liable for penalty of 100 percent in addition to TDS liability already imposed and the possibility of 3- to 84 month jail term."

But this may not be all bad for the crypto ecosystem as it might incentivize retailers to return to local exchanges.

"Until now there was no penalty for non-deduction. Budget 2023 has now established that," said Ashish Singhal, a co-founder of Indian crypto investing app CoinSwitch Kuber.

"This is to say, don’t try to avoid TDS by using offshore or non-compliant platforms. You may be penalized as per Section 271C of the Income Tax Act. If you are investing in crypto, use a tax-compliant platform," he said.

Alternatively, the penalty written into the law in 2023 could provide even less incentive for crypto traders than after the rules in 2022. Last year the industry had predicted the year would lead to a "period of pain."

This proved to be ostensibly true, even if there were other contributing macro economic factors. Crypto trading volumes plummeted almost immediately and interest in crypto nosedived.

Several individuals closely working in the crypto regulatory space had publicly said they were hopeful for a tax cut, but privately said that it was unlikely, CoinDesk reported earlier this week.

The primary demand from the industry and recommendation from policy think tanks was to reduce the TDS to 0.01%, or at minimum to 0.1%.

No changes to existing crypto taxes has left "Indian crypto companies on the stairway to heaven," said Rajagopal Menon, vice president of Indian crypto exchange WazirX. "We hope that the government will reconsider its position on crypto taxes."

Sumit Gupta, the co-founder of CoinDCX, another Indian exchange, said this was "not good for our country and those building in this sector in India" but that he was still "committed to partnering with the government to devise policies that are conducive to the sustainable growth of the ecosystem."

India has kept a crypto bill in cold storage since early last year, saying crypto regulation cannot succeed without global coordination – something it's prioritized with its agenda-setting power as this year's G-20 president.

The Finance Ministry did not immediately return a request for comment.

UPDATE (Feb. 1, 2023, 07:18 UTC): Changes headline, adds industry reaction comment.

UPDATE (Feb. 1, 2023, 08:48 UTC): Adds industry comment in seventh paragraph.

UPDATE (Feb. 1, 2023, 13:50 UTC): Adds details on provision about penalty.


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Amitoj Singh

Amitoj Singh is a CoinDesk reporter.