The Finance Bill, 2022, proposes to define VDA by way of inserting clause (47A) to Section 2 of Income Tax Act, 1961 (IT Act). The definition starts with the term 'means' which makes it clear that it is exhaustive in nature and the intention of the legislature is to freeze the scope of the term. Further, it is clear from the definition that the scope of VDA does not include Indian currency or foreign currency. Cryptocurrency has not yet been given legal sanction in India though it has been mentioned that RBI would bring in digital currency - Central Bank Digital Currency (CBDC) using blockchain and other technologies from 2022-23.
The definition proposed makes it clear that the intention is to include any information or code or number or token generated through cryptographic means or by whatever name called which provides for a digital representation of value exchanged and includes NFTs and any other digital asset as notified in the Official Gazette. The observation that can be drawn is that government reserves the right to introduce their own VDA in future, as the case may be.
VDAs can be transferred either for consideration or without consideration and as they are intangible in nature, they are not available in physical form. The proposed definition extends to Non-Fungible Tokens or NFTs which are tokens or currencies which can be exchanged for other such cryptocurrencies. Further, they can be transferred, stored or traded electronically. Though there is no legal framework VDAs that do have inherent value are used in financial transaction or investments. In one sense, the value depends on how it is transacted within the closed group which uses it and supply of such assets. It has some features of an asset as it has value and can be transferred from one person to another who can act as the owner.
As per the explanatory memorandum to Finance bill, 2022, provisions with respect to taxation of VDAs shall take effect from 1st April, 2022.
Proposed scheme for taxing of VDAs
The Finance Bill, 2022 proposes to insert Section 115BBH in the Income Tax Act, 1961 which will provide for tax on the income from transfer of virtual digital assets. The proposed section starts by providing that total income shall include any income from the transfer of VDA. It is important to note that the taxability arises on transfer and not just sale. Though transfer is not defined for a VDA, the definition of transfer for purposes of capital gain can be referred to. Section 2 (47) of the IT Act defines transfer in a wide manner to include extinguishment, relinquishment, gift etc. The tax payable on the transfer of any virtual digital asset will be 30%. However, no deduction in respect of any expenditure or allowance or set-off of any loss, except for the cost of acquisition, shall be allowed at the time of computation. Further, no set-off of loss from transfer of VDA shall be allowed against income computed and such loss shall not be allowed to be carried forward to succeeding assessment years. The proposed clause will take effect from 1st April, 2023 and will apply to AY 2023-24 and subsequent assessment years.
As per the explanatory memorandum to Finance Bill, 2022, in order to widen the tax base from the transactions so carried out in relation to VDAs, it is proposed to insert Section 194S to provide for deduction of tax on payments for transfer of VDA to a resident at the rate of 1% of such sum (TDS). Proviso to the proposed sub-section (1) of Section 194S says that it is the responsibility of the recipient to ensure that tax has been paid in respect of such consideration for the transfer of VDA before actually releasing the consideration. Proposed section also specifies two situations where no tax is deductible. Firstly, where the consideration is payable by a specified person and the value of such consideration does not exceed Rs. 50,000 during the financial year and secondly where the consideration is payable by any person other than the specified person and the value of such consideration does not exceed Rs. 10,000 during the financial year. Specified person covers individuals and HUFs whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of the profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred or individuals and HUF who do not have any business or professional income.
In case where a transaction attracts deduction under both Section 194O pertaining to deduction of tax by e-commerce operator and Section 194S, deduction shall be made in accordance with Section 194S and not Section 194O.
In order to provide for taxing the gifting of VDAs, Finance Bill, 2022 proposes to amend Section 56 to include VDA under the definition of the term 'property' as given under explanation to Section 56 of the Income Tax Act, 1961.
Issues in the proposed taxation scheme
The issues that need to be noted/addressed are:
- VDAs transferred without any consideration are covered under income from other sources as per Section 56. VDAs have not been classified as capital assets though income arising on their transfer is taxable. The tax rate of 30% suggests that such income is treated on par with winnings from lotteries, betting etc.
- Trading in cryptocurrencies is also undertaken as a business similar to trading in investments but under the present scheme, such activity is not recognized.
- The proposed sections mandate deduction of tax but no rules or method has been prescribed on how to compute the value or fair market value (FMV) in relation to VDAs.
- Exchange of one VDA for another will also be covered under the provisions but the recipient of such transfer will have to ensure that the other person is paying the tax. It may be very difficult to comply with the TDS provision since the transferee may not have details of the transferor or the wherewithal to seek information.
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