The Union budget 2022 brought much-needed clarity on the taxation of cryptocurrency and NFTs. This was a requirement as the current regime did not offer any specific provisions for income arising from the sale and purchase of cryptocurrency and NFTs. This led to ambiguity as to how this income should be treated, with possible heads being Business Income, Capital Gains and Other Sources. Since each head offers different ways of calculation of income, it became necessary for the government to provide clarity to avoid potential notices and arbitration.
The Finance Minister introduced the concept of Virtual Digital Assets by the Finance Bill 2022 and we would look at the bare language and interpretation of the same-
1. Definition
Section 2(47A) of the Income Tax Act has been added as follows-
"virtual digital asset" means- -
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value 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 including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify"
While cryptocurrency are covered under clause (a) and NFTs are covered under clause (b), the government has added clause (c) to bring under purview any future technology which may not fall under (a) and (b) but the government feels that needs to be taxed at par with other Virtual Digital Assets.
2. Tax Rate and loss set off
Section 115BBH has been added as follows-
"(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of- -
(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent.; and
(b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).
(2) Notwithstanding anything contained in any other provision of this Act,-
(a) no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and
(b) no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment."
The tax rate for income from virual digital assets has been kept at 30%, which is usually the highest tax rate, without surcharges. No slab benefit is available for this income.
The income will be computed as sale from proceeds, less cost of acquisition. No other expense ancillary to the transaction will be allowed as deduction.
Regarding set off, no loss from other heads of income can be set off against the income from virtual digital assets, and further, loss from virtual digital assets cannot be set off against any other income. Further, this loss cannot be carried forward to further years.
3. TDS provisions
Section 194S has been added as follows- (Extract only)
"(1) Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one per cent. of such sum as income-tax thereon:
Notwithstanding anything contained in sub-section (1), no tax shall be deducted in a case, where-
(a) the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or
(b) the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial "
The above is only an extract of the section, and the crux is that whenever any payment is made for the transfer of VDA, the payer is required to deduct TDS at 1% of the transaction value and deposit the same to the government. This would also be true even if the seller is making a loss on such a transaction.
For Individuals and HUFs with turnover from business not exceeding Rs 1cr or turnover from profession not exceeding Rs 50 lakhs in preceding FY or not having business and professional income in preceding FY, the limit for deduction of TDS is Rs 50,000, For other assessees, the limit is Rs 10,000.
4. Gifting
Any gift of Virtual Digital Asset is taxable in the hand of recepient. The provisions of section 56(2)(x) shall apply to such transaction.
Examples
Note: The computation has been made under the old regime tax rates and does not include cess-
Example 1- Income from VDA and other heads
- Income from Salary - 8,00,000 Income from VDA - 1,00,000
- Tax on Salary at slab rate- 72,500
- Tax on Income from VDA at 30% - 30,000 Total Tax - 1,02,500
Example 2- Income from VDA and loss in other head
- Business Loss - (4,00,000) Income from VDA1 - 1,50,000 Loss from VDA2 - (50,000)
- Tax on Business Loss - Nil (can be carried forward) Tax on Income from VDA at 30% - 30,000
- Total Tax - 30,000
Example 3- Income in other head and loss from VDA
- Income from Salary - 8,00,000 Income from VDA1 - 50,000 Loss from VDA2- (1,50,000)
- Tax on Salary at slab rate- 72,500
- Tax on loss from VDA - Nil (Loss of 1,00,000 cannot be carried forward)
Disclaimer: While extreme care has been taken while preparing the information, this does not construe legal advice. The author would not be liable in case the department does not agree with the same treatment. It is advisable to consult a tax professional in case a similar transaction needs to be carried out.
The author is a practising Chartered Accountant with keen interest in current affairs and can be reached out at shubham.singhal@
CAclubindia
