VIRTUAL DIGITAL ASSETS

 30% Tax On Income From VDA

Finance Minister Nirmala Sitharaman, in her Budget 2022 speech on Tuesday (February 1), announced a 30 per cent tax on income from virtual digital assets (VDA). She further clarified that no deduction in respect of any expenditure or allowance shall be allowed while computing such income except the cost of acquisition. Additionally, she also proposed a TDS on payment made in relation to the transfer of virtual digital assets at 1 per cent above a monetary threshold. There are other clauses under the newly proposed Section 115 BBH, including one that states losses cannot be adjusted against other sources of income.

To be sure, nowhere in her budget speech or in the budget documents has the word ‘cryptocurrency’ been mentioned. Instead, the budget spoke of ‘virtual digital assets’ and defined them as “any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically.” This definition, specifically, includes non-fungible tokens (NFTs). The new cryptocurrency – or virtual digital asset – tax comes into force on April 1, 2022.

Cryptocurrencies exchange hands in more than one way. Unlike a normal buy-sell of equity shares, mutual fund units and other such regulated assets, cryptocurrencies are not strictly bought and sold on exchanges. Many times, two people exchange cryptocurrencies through their wallets. A sale of crypto coin, on the other hand, involves normal cash or currency. The Budget proposals aim to tax both types of transactions. Gifts of virtual digital asset will now be taxable in the hands of the recipient.

In the memorandum explaining the provisions in the Finance Bill, the government said that “Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill.”

Seen globally, in terms of tax regulations, UK does not consider VDA’s as currency or money but as a commodity. In Singapore as well as in Hong Kong, the tax treatment for the holder of digital token depends on the characterization of the token, the method of receipt/ disposal of the tokens, and the circumstances surrounding the receipt/disposal. Whether Tax Treaty benefits would be available to the non-residents on gains made from investing in VDA’s in India. Further, whether cost of mining the cryptos or foreign exchange fluctuation will be as a deduction against the revenue generated.

Another question is how computation mechanism for sale of ‘Non-Fungible Tokens’ would work, since these are essentially self-generated assets, unlike the cryptos traded in the platforms. History of taxation has shown us rulings where Capital gains taxation was struck down by the Courts where the Computation mechanism fails. Whether there is a possibility of the revenue invoking section 69 for transactions entered in the past dealing with un-explained investments, necessitating taxpayers to have proper documentation. Also what shall be the GST implications on VDA’s going forward considering that the Budget proposals have only clarified the position on taxation under the income-tax law.

To conclude by virtue of the budget 2022, investors dealing in VDA will have to pay taxes in India computed at 30 percent with applicable surcharge (ranging from 10-37 percent) & expect suitable regulations which will further govern and impact the trades made on such assets. Whether the tax proposals will result in glut of supply of VDA into the market following a heavy sale to avoid tax or whether it would shift investments from this asset class into equity markets, which have the benefit of lower taxation remains to be seen.