Recently, the Finance Minister of India, during her presentation of the fifth Budget proposed to levy a tax of 30 per cent and tax deduction at source of 1 per cent on any income derived from the transmission of any virtual digital assets. However, after presenting the Budget, the Finance Minister mentioned at a press conference that discussion is in progress with stakeholders on digital assets and there is no clearness yet on how the Government of India will legalise or regulate crypto currencies.
For many years, speculations were widespread that crypto-currencies will be prohibited in India. In the past the Government and the Reserve Bank of India (RBI) have warned people against judging crypto currencies as legal tender. The fact that dealings utilising such currencies can certainly sidestep the tax net, and therefore be used for unlawful transactions, have been troubling governments across the world. In 2018, the RBI instructed banks not to offer services to the cryptocurrency ecosystem. Nevertheless, the Supreme Court set this aside, naming the move uneven, given that such currencies were not prohibited in the country. A statute on cryptocurrencies, which was supposed to have been brought in the previous year, is yet to see the light of the day. The comprehensive anticipation about the Government’s approach to this was set by a 2019 report by an inter-ministerial committee which recommended a ban on all cryptocurrencies.
Nonetheless, crypto investments have witnessed an enormous surge. By the ecosystem’s own disclosure, over 10 crore Indians already owned crypto-assets by 2021, hinting at a penetration level comparable to shares and mutual funds. The Finance Bill 2022 that was tabled in the Parliament a few days ago did not make any official declaration about legalising it, still, it has announced a new taxation regime for the class of “virtual digital assets” (VDA) comprising crypto currencies and non-fungible tokens (NFTs). Although the crypto currencies such as Bitcoin and Ethereum, yet to get recognition from the government, people are trading in digital assets in huge numbers.
Many crypto investors were delighted although the government included crypto assets in the ambit of capital gain with a hefty tax and they assumed that it would legalize crypto assets. Unfortunately, any guess that the Budget announcement makes crypto assets “legal” is totally misunderstood. Income is taxable regardless of how the income was earned.
What are VDAs?
The finance bill 2022 defined the phrase “virtual digital asset” (VDA) by inserting a new clause (47A) to section 2 of the Income Tax Act. According to the suggested new clause, a virtual digital asset is proposed to mean 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.
Primer on Crypto taxation
The government has for the first time offered explanation for crypto assets and specified a list of proposals on the taxation of this new asset class. In addition to blanket tax 30% and TDS 1%, the government has also proposed that except for the cost of acquisition, no deduction will be permitted. Moreover, losses arising from transfer of crypto assets cannot be set off against any other sources of income. However, losses in one crypto can be set off against gains in another within the same financial year while assessing gains. Surcharge will be applicable on the tax computed on the transmission of digital assets where total income is more than Rs 50 lakh and cess will be applicable in all cases.
The government did not explain if digital assets will be a currency, commodity, or security. Due to such ambiguity, the virtual digital asset should be classified as a capital asset and any gains arising on the transmission of such asset shall be taxable as capital gains. A non-resident is taxed in India on income that is received or deemed to be received in India or accrues or is deemed to accrue and arise in India. Gifting of digital assets will be taxable in the hands of the recipient if the value of assets exceeds Rs 50,000.
Other countries’ viewpoint
The nations across the world have taken contradictory opinions regarding crypto assets. Few nations such as China have debarred digital assets altogether. In contrast, countries like El Salvador have welcomed the new technology and announced it as their legal tender. Countries that are in favour of crypto assets are either incorporating revisions to their current tax policies or passing a separate law for tackling queries relating to such assets.
A regulation law needed
The government’s decision to tax cryptos and other virtual digital assets and lay down ground rules for the purpose in the recent Budget, is welcome step. This erases vagueness about the tax treatment of virtual assets and establishes a money trail for the authorities to follow. Now the next step should be to design a law to regulate them. India should enact a separate law to legalise digital assets by way of a power-packed Crypto Bill.
If the govt delays the process of legalising of cryptos, it would lead to disaster and will serve as a breeding ground for money laundering. Rise of dark sites could increase the challenges faced by the government.
(The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa)
