India Strengthens Crypto Tax Rules with Fines and Jail Time for Non-Compliance

India has maintained its strict crypto tax rules from 2022 into 2023, adding potential fines or jail time for non-compliance to the provision around tax deducted at source (TDS).

New Rules to tighten ropes on TDS payment defaulters

Finance Minister Nirmala Sitharaman omitted any reference to crypto, digital assets, blockchain, or central bank digital currencies in the recent budget announcement, but there was a modification to the TDS regulations impacting virtual digital assets (VDAs) included in the fine print.

In 2022, India introduced a 30% tax on profits and a 1% TDS on all crypto transactions. The 1% TDS remains in place, but until now, there was no provision in the law that imposed a penalty for failure to comply. This means that if a citizen tried to evade paying the tax or made an incomplete payment, a retailer could argue in court that no penalty was prescribed, resulting in just tax liability.

However, now a fine equivalent to the tax liability and/or jail time of 3 to 84 months could be imposed for non-compliance. The amendment proposes a fine and possible imprisonment for at least three months and up to seven years, according to crypto tax advisor Anoush Bhasin, who is also a founder of Quagmire Consulting.

This amendment is specific to crypto-to-crypto transactions and seeks to “amend the penalty and prosecution provisions,” says Sandeep Jhunjhunwala, a partner at Nangia-Andersen LLP. The penalty 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.

India’s Parliament still needs to adopt the provision and make it into law, which is expected to happen given the Prime Minister’s party controls both houses of the legislative body. The provision is expected to take effect on April 1, 2023.

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 new amendment is expected to target retailers using foreign exchanges.