Tax on Cryptocurrency | TDS u/s 194S | Proposed Finance Bill, 2022

Scheme for taxation of virtual digital assets

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.

Tax on virtual digital asset

1. Amendment effective from 1st April, 2023 and will accordingly apply AY 2023-24 (FY 2022-23) onwards.
2. The proposed Finance Bill seeks to tax any income from transfer of any virtual digital asset at the rate of 30%.
3. No deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed.
4. No set off of any loss arising from transfer of virtual digital asset shall be allowed against any income and such loss shall not be allowed to be carried forward to subsequent assessment years.

Comment - A flat tax rate of 30% is applicable on transfer of any virtual digital asset. No benefit of basic exemption limit is available. Also, No deduction under Chapter VI-A (Section 80C to Section 80U) shall be allowed from such income. Further, Deductions in respect of any expenditure and set off of any loss is not available. Only Cost of Acquisition is allowed to be deducted for the purpose of calculating income. However, the amount of rebate under section 87A is available (Income tax rebate upto maximum of Rs. 12,500)

Example - if you have sold any virtual digital asset amounting to Rs 100,000 and the cost of acquisition is Rs. 10,000, the net income from sale of virtual digital asset will be 90,000 (100,000 – 10,000), then the tax liability (before rebate under section 87A) shall be Rs 27,000 (90,000*30%).

TDS on virtual digital asset

1. Effective 1st of July, 2022, Proposed TDS (section 194S) on payment for transfer of virtual digital asset to a resident at the rate of 1% of such sum. Also, in case the payment for such transfer is– (i) wholly in kind or in exchange of another virtual digital asset where there is no part in cash; or (ii) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer, the payer before making the payment shall ensure that the tax has been paid in respect of such consideration.

• Comment - Through this section, Government is making sure that all transactions involving virtual digital asset gets reported and hence gets taxed. In case of any payment made by Crypto Exchanges, TDS will be deducted @1% on such sum of payment. Further, in case, cash is not sufficient to meet the liability of deduction of tax, then Payer shall release the payment only if either- 1. He has collected the amount equivalent to TDS amount from the payee. 2. He insists the payee to make the payment of TDS on his own & submit the proof to the payer. This is in line with TDS u/s 194B (Winning from Lottery etc,) and we assume same TDS mechanism will be followed for 194S.
• TDS will be applicable on any transfer of virtual digital asset. Therefore, if for eg. Bitcoin is sold and converted to USDT, then this will also be considered a transfer and hence TDS is applicable.

2. In case of specified persons, the provisions of section 203A (requirement to obtain TAN) and 206AB (TDS at higher rate for non-filers of ITR) will not be applicable.
3. No TDS if the payer is the ‘specified person’ and the value of consideration to a resident is less than Rs. 50,000 during the financial year. In any other case, the said limit is proposed to be Rs. 10,000 during the financial year.
4. ‘specified person’ means a person:––

• being an individual or Hindu undivided family – Turnover from Business does not exceed 1 crore rupees or Turnover from Profession does not exceed 50 lakh, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
• being an individual or Hindu undivided family - having income under any head other than the head ‘Profits and gains of business or profession’.

5. Proposed that if tax has been deducted under section 194S, then no tax is to be collected or deducted in respect of the said transaction under any other provision of the Act.

• Comment – In case the payer is a Individual or HUF, having turnover from Business less than or equal to Rs 1 Crore or having turnover from Profession less than or equal to Rs 50 Lakhs or having income under any head other than the head ‘Profits and gains of business or profession and the value of consideration transferred to a Resident with respect to virtual digital asset is less than Rs.50,000, there is no liability on such Individual/HUF to deduct tax. In any other case, the said limit is proposed to be Rs. 10,000 during the financial year.
• If the payer is a specified person, there is no requirement of obtaining TAN to the specified person.

6. Proposed that in case of a transaction where tax is deductible under section 194-O (TDS on Payments Made to e-commerce Participants) along with the proposed section 194S, then the tax shall be deducted under section 194S and not section 194-O.

Gifting of virtual digital assets

1. Amendment effective from 1st April, 2023 and will accordingly apply AY 2023-24 (FY 2022-23) onwards.
2. Proposed taxing the gifting of virtual digital assets and hence, the expression "property shall include virtual digital asset.

Comment – Finance bill has proposed to tax the virtual digital assets received as gift in the hands of the recipient. Hence, any virtual digital assets received as gift will be taxable to the recipient of gift. As per section 56, the fair market value on the date of transfer of gift shall be deemed to be income in the hands of recipient and will be chargeable to tax under the head "Other Sources". Therefore, this gift income will be included in the slab of income and hence benefit of basic exemption limit is available.

Definition - virtual digital assets

1. Amendment effective 1st April, 2022.
2. Proposed definition for "virtual digital asset" as per section 2 (47A) (proposed) - 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. Non fungible token and; any other token of similar nature.
3. Central Government may notify any other virtual digital asset as virtual digital asset by way of notification. Also, The Non-fungible tokens means such digital assets as notified by the Central Government. Further, Central Government can notify such assets which shall not be considered as virtual digital assets for the purposes of the proposed section.

Points to be Considered

1. Virtual digital assets will be taxed under the head "Capital Gains" or under "Other Sources" is not yet clear. The bill proposes taxation of virtual digital asset similar to Section 115BB – Winning from the Lottery, Crossword Puzzle, Race, Games etc. which implies ‘Other Sources’, however, the bill also uses the term ‘Cost of Acquisition’ which implies Capital Gain. Therefore, there is still an ambiguity with respect to head of income under which income from virtual digital assets will be taxed.
2. Seller of virtual digital asset is not known to a buyer of virtual digital asset, who will be responsible for paying the consideration, since the buy sell transactions happen only on the exchanges. Hence, the role of exchanges in these transactions needs to be clarified. Also, how will the Foreign exchanges like Binance will be regulated by the Indian government needs to be clarified.
3. It is also not clear that how the Initial Coin Offer (ICO) will be taxed.
4. Fair Market Value needs to be determined for calculating the value of consideration in case of transfer in Kind (no cash transfer) or in case of gift of virtual digital asset. This Fair market value is different on different exchanges For eg. Value of Ether coin might be different on Binance and Coin DCX. Hence determining the Fair market value might be a challenge.

Implementation of regulations relating to the virtual digital asset space will be a challenge for the Indian government. Imposing the tax on virtual digital asset makes the crypto trading official and any concerns of a ban are off the table now. How will the government be able to implement these regulations in India will be a matter to look out for in the near future.

Source: https://www.indiabudget.gov.in/doc/memo.pdf