Can India’s controversial new tax law be challenged in court? Yes, say Crypto Lawyers
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India’s top legal experts say the crypto community would have a “fair chance” if they challenge a 1% withholding tax written into a new crypto tax law in court.
The Crypto Tax Law imposes a 30% tax on profits from crypto transactions, effective April 1. Traders will not be able to offset 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 the recipients.
The most controversial provision – the 1% withholding tax (TDS) – will not come into force until July 1.
TDS is a liability imposed on exchanges that file tax on behalf of sellers on the platform. It will be calculated at 1% of the value of the transaction. The seller would be able to deduct this 1% TDS from their total 30% tax liability. The TDS mechanism is used to trace transactions and prevent tax evasionaccording to the government.
Several crypto lawyers told CoinDesk that they believe challenging the crypto tax law as a whole (both 30% profit tax and 1% TDS) would be a âbad move.â
They struck a different tone when discussing a legal challenge to the single 1% TDS.
Two law firms – Nishith Desai Associates and Ikigai Law – challenged an earlier decision by an adjacent government institution.
The Reserve Bank of India (RBI), the country’s central bank, issued a circular that effectively blocked banks from providing services to crypto exchanges in 2018. The country’s Supreme Court overturned 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 collectively manages policy on behalf of crypto companies. His attorneys declined to comment on the pros and cons of a legal challenge to the new crypto tax law.
Ikigai Law was the firm representing crypto exchanges in the RBI case. Its founder and managing partner, Anirudh Rastogi, told CoinDesk that he thinks âthere are good arguments to be madeâ against the new crypto tax law.
âGoing to court may well be the only recourseâ¦especially when it comes to TDS, more so than the tax rate itself. The TDS rate and provision is arbitrary and will have a significant impact on operations. On the TDS, I believe there is a strong case to be made and that is something we have looked into,â Rastogi said.
The Goa-based lawyer confirmed that his firm had explored contacting the Supreme Court to challenge the 1% TDS provision in the new Crypto Tax Act, but said no one from the crypto industry has done so. had approached.
“The 1% TDS is going to suck the cash out of the system entirely, which means exchanges can’t really operate. It also doesn’t serve the government’s goal of essentially increasing the tax base,” Rastogi said. .
The provisions can be challenged for violation of the fundamental right enshrined in the constitution of the right to trade or Article 19 (1) (g) which states that “All citizens have the right to practice any profession or ‘carry on any occupation, trade or business,’ he said.
Rastogi and representatives of Nishith Desai Associates did not comment on the possibility of a legal challenge to the 30% profit tax.
Other Legal Notices
Rashmi Deshpande, an independent lawyer with a background in crypto-related cases, believes the legal strategy to approach the Supreme Court is key.
âIf you’re talking strictly about precedence and legal principles, this (challenging all crypto taxes as a whole) is not a good case to challenge in the Supreme Court. Right now, crypto firms should maintain an open dialogue with the government. Only dialogue can soften the government’s strict stance,â Deshpande said.
However, specifically challenging the 1% TDS is a whole different ball game.
She said “the 1% TDS can be challenged as an inefficient mechanism to recover tax”.
Rajat Mittal, a tax lawyer at the Supreme Court of India who advises crypto firms, said that “the Supreme Court is unlikely to interfere in a challenge to the imposition of the 30% tax, as the political decisions of the government are not subject to judicial review”.
He believed that any legal challenge raised should be in the High Courts (which are the highest Courts of Appeal in India), especially the TDS provision.
âTDS can be challenged as it will be fatal to the existence of centralized exchanges as users will migrate to non-KYC ones. [know your client] trade that would qualify as differential treatment,â he said.
For Mittal, the grounds for challenging the 1% TDS rule could be that it âliterally puts exchanges out of business.â He cited the same provision of the Indian constitution as Rastogi, saying it gives freedom to trade and on the grounds of Article 14 which provides for equal treatment “since Indian exchanges will lose out to non-KYC exchanges and that customers will prefer because of the 1% TDS”.
Vijayendra Pratap Singh, a partner at AZB & Partners, a leading financial firm, said tax laws cannot be suspended by interim orders without special circumstances.
âIf the law cannot be suspended, the same will be applied. Therefore, people will have to start paying taxes and settling transactions after deducting tax at source,â Singh said.
Crypto community explores legal remedies
CoinDesk reported earlier that several industry leaders who did not wish to be named had declared the possibility of challenging the 1% TDS provision and the 30% profits tax in the Supreme Court. had been discussed.
An industry insider who asked not to be identified because the discussions are private said the exchanges are waiting for the industry body, the Internet & Mobile Association of India (IAMAI), to make a decision. on a legal challenge to tax law.
So far, the Indian crypto community and industry have expressed outrage, but concrete reactions to the crypto tax law are expected.
Online campaigns titled #ReduceCyptoTaxes and #UnfairCryptoTax have dominated the crypto conversation on social media. Opposition MPs who have criticized the government for its policies with speeches in Parliament have been famous.
Predictions about a accentuated exodus of the crypto industry have said that âIndia will experience the biggest brain drain in history over the next eight to 12 monthsâ because the new rules are âchaining the industry,â resulting in the departure of âpotential entrepreneursâ âout of the country,â 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 taxes on crypto.
“Wait for indirect taxes”
In addition to waiting to see the true impact of these taxes on the industry, legal exports believe that crypto businesses should wait for the announcement of indirect rates or the GST (goods and services tax).
GST is an indirect tax which replaced many other indirect taxes in India such as excise duty, value added tax, service tax and others in 2017.
While direct tax proposals become law through parliament, India has a different rule-making process for indirect taxes. This tax legislation is crafted by the GST council, which follows the ideals of federalism in which different states and the central government together develop policies. The council is made up of finance ministers from the central government and all the states.
Reports suggest that GST authorities are developing crypto tax policies and are of the view that crypto should be taxed at 28%, the highest tax slab for luxury goods, such as cars luxury, or speculative activities, including betting, gambling or horse racing.
Deshpande thinks the industry âshould patiently wait for the announcement of GST rates and then rethink the litigation strategy.â
âThere is no point in filing a writ petition in the Supreme Court which can agitate the GST board as they charge you the top rate of 28%,â she said.
AZB’s Singh also believed that “since 11 exchanges have been the subject of tax inspections recently, this shows increased attention from the tax authorities for any evasion.
âTherefore, the writing is on the wall of what could happen is an increased focus on tax compliance. Therefore, it would be prudent to come up with a legal strategy that looks at compliance alongside the challenge,â he said.
CORRECTION (April 5, 2022, 4:15 UTC): Corrects the paragraph above the “Other Legal Opinions” subheading to indicate that Rastogi and representatives of Nishith Desai Associates have not commented on the possibility of a legal challenge 30% income tax.