Given the recent buzz around cryptocurrency, it is important to understand the trend or flow of events that have occurred recently. On 6 April 2018, the Reserve Bank of India (RBI) issued a notification cautioning all users, holders, and traders of cryptocurrencies, about risks associated to dealing with unregulated virtual currencies. It stated that all transactions involving virtual currency/ tokens will not be supported by the banking system, and bank accounts would be withdrawn from persons transacting in virtual currency. Subsequently, on 4 March 2020, the Supreme Court set aside the aforesaid RBI notification. Since banks were not permitting payments for cryptocurrencies using their system, the RBI subsequently issued a clarification on 31 May 2021, that since the aforesaid 2018 notification was set aside by the Supreme Court, there is no express prohibition on banks honouring cryptocurrency related transactions.
According to the Lok Sabha’s bulletin dated 23 November 2021, the government introduced Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, with the objective of laying the framework for official digital currency to be issued by the RBI, prohibiting all private cryptocurrencies, and permitting certain exceptions to promote the underlying technology of cryptocurrency. It appears that the Cryptocurrency Bill would not be tabled in the budget session. Further, the government’s tax on virtual digital assets (VDAs) appears to be a tacit recognition of private cryptocurrencies, and largely ends the uncertainty over the future of cryptocurrencies in India.
Taxation of virtual digital assets in India: In the budget, the government acknowledged that there is a phenomenal increase in transaction in VDAs, hence the need to regulate and tax the same. The definition of VDAs has been kept very wide in the Finance Bill, 2022 . It contains enabling language to allow the government to notify additional assets or specifically exclude any digital asset from the ambit of this definition. Since the definition is wide, as of now it is unclear whether assets or benefits like digital gift cards, loyalty or cashback points on cards would also be included, because they are also a store of value and can be stored electronically.
From a taxation perspective, there are three major announcements with respect to virtual digital assets:
Separate tax rate: The government proposes a separate tax at the rate of 30% on the gains arising to a taxpayer from the transfer of VDAs. Interestingly, it does not differentiate between a resident and non-resident taxpayer. Hence, it appears that gains arising to non-residents would also be taxed under this regime, subject to the satisfaction of the situs rule with India. From an income computation perspective, it is proposed that except for the cost incurred in acquiring the VDAs, there can be no deduction of expenses or set-off any loss against the transfer of any VDAs. It is unclear whether infrastructure costs incurred in mining cryptocurrencies would be treated as cost of acquisition, and hence be a permissible deduction. Also, there is no separate tax rate prescribed for nil or inadequate consideration. It is also proposed that losses incurred due to the transfer of VDAs cannot be set off against any other income. However, it is unclear whether the losses arising from the sale of one VDA can be set off against the gains arising from another VDA. Owing to the high volatility of VDAs, addressing this issue would become very crucial, and we expect it to be clarified when Finance Bill is passed.
Tax on gift: The government has proposed that the purchase of VDAs for nil or inadequate consideration will be taxable in the hands of the recipient unless it falls within the list of specified exemptions, such as gifts from relatives.
Tax deduction at source: Persons making payment to residents for the transfer of VDAs would be required to withhold tax at the rate of 1%. Since the person responsible to deduct tax has not been defined, it may include a non-resident as well. To ensure that unnecessary burden is created on small transactions or taxpayers, it is clarified that this TDS requirement would apply only if the consideration were more than ₹10,000 during a financial year, and a limit of ₹50,000 is specified for HUFs etc. If the consideration is wholly or partly in kind, then the person responsible to pay such consideration is required to ensure that the tax has been paid before releasing such consideration. Further, if tax has been deducted in this manner, then there is no requirement to deduct or collect tax under any other provisions of the Income Tax Act, 1961. Although there are many clarifications required to ensure that the taxation of VDAs is seamless, we expect that most of them could get addressed when the government passes the Finance Bill in Parliament.
Gaurav Sahay is partner at Link Legal and Vinu Peter Immanuel is associate partner at Link Legal.
