In India’s rapidly evolving financial landscape, cryptocurrencies have emerged as a significant player, attracting both seasoned investors and newcomers.
However, alongside the thrill of potential gains lies the often-daunting question of taxation. With the government imposing a flat 30% tax on crypto gains, many are understandably curious about minimising their tax burden.
Despite its appeal to some, crypto tax evasion presents many risks that far outweigh any perceived benefits. Attempting to bypass tax obligations undermines the financial system’s integrity and exposes individuals to severe legal consequences.
The Income Tax Department of India has ramped up its surveillance and enforcement measures, making it increasingly difficult for evaders to slip through the cracks.
This post delves into the intricacies of crypto tax evasion in India and highlights why such practices should be avoided.
What Is Crypto Tax Evasion?
Since the introduction of crypto tax in India, crypto investros and traders are required to report their capital gains to income tax and pay their taxes accordingly. Crypto tax evasion is the deliberate attempt to avoid paying taxes on cryptocurrency earnings. This can take several forms, including:
● Failing to report crypto income is the most common form of evasion. You’re evading taxes if you buy, sell, or trade crypto and neglect to report these transactions on your tax return.
● Underreporting capital gains is another form of evasion. If you sell your crypto for a profit, you must report and pay taxes on those gains; failing can lead to severe consequences.
● Hiding crypto income: Some individuals attempt to conceal their crypto holdings and transactions. This might involve using offshore exchanges or complex anonymity techniques.
It’s important to understand that crypto tax evasion is a serious offence with significant consequences. In the next section, we’ll explore the risks of this path further.
Penalties For Not Reporting Crypto Taxes in India
When you fail to report cryptocurrency in your Income Tax Return (ITR), the Income Tax Department (ITD) may issue a notice under section 148/148A of the Income Tax Act.
If an Income Tax Officer (ITO) suspects that a taxpayer has inaccurately disclosed their income and evaded their tax liability, they will issue a ‘Notice for Income Escaping Assessment’. This process involves two stages.
Initially, before issuing a notice under section 148, the ITO will serve the taxpayer with a 148A notice. This preliminary notice allows the taxpayer to provide explanations or arguments to avoid the issuance of a Section 148 notice.
If the ITO finds that cryptocurrency or any other income has been unreported, they can issue a 148 notice within three years from the end of the relevant assessment year.
However, if the evaded income exceeds INR 50,00,000, the ITO can issue the notice up to ten years from the end of the relevant assessment year.
After issuing a notice, the ITO will reassess the taxpayer’s income under section 147 of the Income Tax Act.
Penalties For Crypto Tax Evasion
In India, tax evasion penalties depend on the violation’s extent and severity. Here’s a concise overview:
● Under-reporting or misreporting income will attract a penalty between 50% to 200% of the due tax and can lead to imprisonment for up to 7 years.
● Filing an Income Tax return after the deadline incurs an interest charge of 1% per month, along with late fees ranging from INR 1,000 to INR 5,000. This offence can also result in imprisonment for up to 7 years.
● Failing to deduct Tax Deducted at Source (TDS) or not depositing TDS with the government after deduction will lead to interest charges and late fees.
● Not filing a TDS return on time will result in a late fee of INR 200 per day.
Penalties Regarding Income Tax Evasion in India
If you earn money through crypto mining, staking or farming, it is considered as a source of income. It will be categorised as income tax evasion if you fail to report it to the income tax department. Here are some situations and their respective penalties related to income tax evasion in India:
Timely Filing of Income Tax Returns
Filing your ITR on time avoids financial penalties. If your income exceeds INR 5,00,000, late fees can reach INR 5,000; otherwise, the cost is capped at INR 1,000. Interest charges under sections 234A and 234B accrue 1% per month for late payments and filings.
Non-Filing of Income Tax Return
Not filing your ITR can lead to severe penalties, including fines and imprisonment. Evading tax over INR 25,00,000 may result in 6 months to 7 years in prison plus fines. For evasion under INR 25,00,000, imprisonment can range from 3 months to 2 years, along with substantial penalties.
Undisclosed Crypto Investments
Failing to disclose cryptocurrency investments in financial records or justifying excess expenditures will render the exceeding amount taxable. This amount faces a 60% tax rate, a 25% surcharge, and a 4% cess, totalling an effective tax rate of 78%. A penalty of 10% of the taxable sum may also be imposed.
Misreporting or Underreporting of Crypto Income in ITR
Understanding the distinction between underreporting and misreporting is essential due to differing penalties in Section 270A of the Income Tax Act. Misreporting includes actions like suppressing facts, not recording investments, false entries, or unsubstantiated expenses. Underreporting income incurs a 50% penalty on the due tax while misreporting incurs a 200% penalty. Severe cases of tax evasion can lead to imprisonment and fines.
Penalties Related to TDS Deduction
The Income Tax Act outlines various penalties for failure to report TDS (Tax Deducted at Source). Understanding these penalties is crucial for compliance.
Failure to Obtain a TAN
Taxpayers must obtain a TAN (Tax Deduction and Collection Account Number). Failure to do so can result in a fine of up to INR 10,000.
Failure to Deduct TDS
If a buyer does not deduct TDS when required, they must pay interest at 1% per month from the due date until the deduction is made. Additionally, the buyer could face penalties equal to the un-deducted TDS amount.
Failure to Deposit TDS
Failure to deposit the deducted TDS to the government incurs an interest rate of 1.5% from the deduction date until the deposit date. Penalties may include fines and imprisonment ranging from 3 months to 7 years.
Failure to File a TDS Return
Taxpayers must file TDS returns using forms 26Q or 26QE. Failure to file on time results in a late fee of INR 200 per day, capped at the amount of outstanding TDS. Additionally, penalties for late or non-filing range from INR 10,000 to INR 1,00,000.
Conclusion
The Indian crypto market offers exciting opportunities, but navigating the tax landscape is crucial for responsible participation. By understanding crypto tax regulations and complying with your obligations, you avoid hefty penalties and ensure a smooth journey within the legal framework.
It’s important to remember that the Indian government is actively monitoring crypto transactions. Crypto exchanges must share information with tax authorities, making transparency the safest and most prudent approach.
