When the government takes the first move toward taxing or regulating a new and confusing ‘financial asset,’ it has a duty to explain its position clearly and unambiguously. The numbers are substantial enough to merit clarification, especially since the government expects to collect taxes on the product’s income. However, as is characteristic of the National Democratic Alliance (NDA), it delayed a decision on regulating crypto money for far too long and, when it did make a decision, it prioritized revenue above legislation—akin to putting the waggon before the horse.
Most people think of taxation in terms of a simple binary: That government can only tax what is legal; if something is illegal, they expect the government to penalize them and exact the forfeiture of ill-gotten gains. Otherwise, isn’t the government a co-conspirator? Taxation functions extremely differently. Unfortunately, in the crypto echo chamber, investors only listen to self-proclaimed “gurus.” So here’s an example that should ring a bell.
In a February 2009 column, tax expert HP Ranina clarified this. “Section 2(24) of the Income Tax Act of 1961 provides a duty to pay tax on any income received,” he stated. He discusses various cases that the Supreme Court subsequently determined. The Supreme Court ruled in Dr. TA Quereshi vs. CIT (287 ITR 547) that “cases are to be decided by courts on legal principles, not moral judgments.” Law is not the same as morality. The Act’s major function is to bring diverse types of income within the tax net.
The income tax authorities are unconcerned about how or thetotal where income is obtained. The income could have been obtained unlawfully or via the use of illegal means. Any illegality associated with the earning has no influence on its taxability… Allowing such revenue to escape the tax net would be nothing more than a bonus or incentive for engaging in an unlawful trade,” he added.
It was also said that the I-T department cannot intervene as a police force to prevent the commission of illegal crimes, but the tax system can tax such money. “The Act takes into account both legally obtained and contaminated money.” In the eyes of the tax collector, there is nothing like unlawful revenue. Even if the assessee is prosecuted by law enforcement authorities for committing an offense, the income obtained by the offender is taxable. In such circumstances, the fact that the State is also becoming a party to the illicit act by sharing the bounty is not a defense.”
The Madras High Court agreed in CIT vs K Thangamani (309 ITR 15), where a tax practitioner claimed TDS refunds by filing false reports in the names of fictional individuals. The substantial questions of law are ruled in favor of the revenue, overturning tax tribunal orders.
Because the government has yet to decide on the legality and regulation of Indian crypto tax and money, many confused young people in India are already accepting payments in it. There is no information on how the 1% TDS will apply after April 2022. Because crypto exchanges are not ‘legal,’ there is little clarity on the implications and procedure for such deduction, particularly for traders.
All of this suggests that those earning in cryptos may be forced to go underground and accept illegal payments that fly under the radar, while those with taxable income and earnings may be in for a harrowing time until the government sorts out what is smugly viewed as a cunning move to collect taxes from trading that has attracted 20 million Indians, primarily young people.
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