Article Explains Definition of virtual digital asset (VDAs), History of VDAs, Why Government levy Income Tax on VDAs?, Is it applicable to Gift card or Vouchers or reward Points, Taxation of Cryptocurrency/VDA Before 31/03/2022, Taxation After 01/04/2022, When virtual digital assets received as gifts are Taxable, Some Practical Illustrations relating to VDA nd also provides More Clarity on Some points related to New Cryptocurrency Tax Rules In India.
What are Virtual Digital Assets:
Section 2(47A) “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:
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.—For the purposes of this clause,—
(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);]
Like – Virtual Digital Assets (VDA) are subsets of all digital assets transacted on a blockchain, such as non-fungible tokens (NFTs), cryptos and other virtual assets. In layman’s terms, it basically means cryptocurrencies, DeFi (Decentralised finance) and non-fungible tokens (NFTs), however not limited to these assets.
History of First Crypto
Bitcoin has been one of the first cryptocurrencies which entered the market in the year 2009, and it was invented by Satoshi Nakamoto. After that, several Cryptocurrencies came into the market, and some of the popular currencies are Bitcoin Cash, Ripple (XRP), Litecoin, etc. As per an estimate, thousands of cryptocurrencies exist as of the year 2022.
Why Government levy Income Tax on VDAs?
VDAs Tax as per Income-tax Act, 1961, has come into force from April 1, 2022 Section 115BBH except for provisions for tax withholding, which came into force from July 1, 2022 Section 194S. The amendments are aimed at discouraging entering into transactions including investment into virtual digital assets, it is widely believed. India can, possibly, be the first country to take such strict statutory measures to discourage transactions in virtual digital assets. The other world shall be keenly observing the execution of these provisions.
Is it applicable to Gift card or Vouchers or reward Points?
As per Notification No. 74/2022, dated. 30-06-2022, the Central Government hereby notifies following virtual digital assets which shall be excluded from the definition of virtual digital asset:
(i) Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services.
(ii) Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services.
(iii) Subscription to websites or platforms or application.
2. This notification shall come into force from the date of publication in the Official Gazette.
Is digital currency different from virtual digital assets?
Yes, Currency is a medium of exchange that can be defined as currency only if it is issued by the central bank. e.g. dollar, rupee etc. Hence, crypto will be called a currency only when it will be issued by the central bank.
Crypto is legal tender in INDIA?
No, Crypto is not a legal tender in INDIA.
VDAs Taxation Before 31/03/2022
No clear guidance from the Income tax department on where crypto income and loss can be reported under which head.
Is it PGBP, Capital Gain, Income from other sources?
On your own, you can decide and report.
VDAs Taxation After 01/04/2022
Section 115BBH
- Gain on VDAs is taxed on 30%.
- No deduction is allowed other than the cost of acquisition.
- No set off allowed to any other income.
- No set off allowed to any other VDAs.
- For Example, Bitcoin Profit and XPR Loss cannot be set off.
- Loss of VDAs shall not be allowed to be carried forward to succeeding assessment years.
Tax on transfer of virtual digital asset shall be charged irrespective of :
(a) income is below the threshold limit or
(b) the assessee has sustained a loss
When virtual digital assets received as gifts are Taxable
As per Section 56(2)(x), of the income tax act, when any person receives any benefit, whose value exceeds Rs. 50,000 the same shall be taxable at prescribed rates. This shall also include deemed income, where deemed income includes but not restricted to Receiving specified movable properties without consideration or for inadequate consideration The deemed income under this provision can arise from the following transactions:
(a) Where any property (includes VDAs) is received without consideration and the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property will be chargeable to tax.
(b) Where any property is received for a consideration that is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the difference between fair market value and consideration is chargeable to tax. In both the situations, the limit of Rs. 50,000 shall be checked for every transaction and not in aggregate of all transactions.
The Finance Bill, 2022 proposes to include virtual digital assets within the scope of movable assets. Thus, if a person receives a virtual digital asset without consideration (gift) or for inadequate consideration and the value of such benefit exceeds Rs. 50,000, it shall be taxable in the hands of the recipient under Section 56(2)(x) as income from other sources.
The above clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA or section 12AB].
(h) by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in subclause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10
Some Practical Illustrations relating to VDA
1.Particulars of Income of individual –
- Income from salary Rs. 1,80,000
- Interest income Rs. 20,000
- Income from transfer of VDA Rs. 45,000
Compute Tax
Solution: Total income (excluding Income from VDA) is below Maximum amount of income not chargeable to tax. Therefore tax on income other than income from VDA is Nil. Tax on Income from VDA is Rs. 14,040 (VDA will taxed at rate of 30% plus surcharge and cess).
As per section 194S of Income-tax act, 1961 provides for deduction of tax on payment on transfer of virtual digital asset to a resident at the rate of one per cent of such sum. However, no deduction will be required wherein the consideration paid during the Financial Year does not exceed Rs. 50,000/- (in case of specified person) or Rs. 10,000/- (in any other case)
2. Particulars of Income of individual –
- Income from salary Rs. 1,80,000
- Interest income Rs. 20,000
- Income from transfer of VDA Rs. 1,50,000
Compute Tax
Solution: Total income (excluding Income from VDA) is below Maximum amount of not income chargeable to tax. Therefore, tax on income other than income from VDA is Nil. Tax on Income from VDA is Rs. 46,800 (VDA will taxed at rate of 30% plus surcharge and cess).
As per section 194S of Income-tax act, 1961 provides for deduction of tax on payment on transfer of virtual digital asset to a resident at the rate of one per cent of such sum. However, no deduction will be required wherein the consideration paid during the Financial Year does not exceed Rs. 50,000/- (in case of specified person) or Rs. 10,000/- (in any other case)
3. Particulars of Income of individual –
- Income from Business: Loss of Rs 10,00,000
- Interest Income: Rs 50,000
- Income from Transfer of VDA: Rs 2,50,000
Compute Tax
Solution: As per Section 71 of the Act, loss from business income (other than speculative business) can be set off against income from other sources.
Therefore, total income excluding income from VDA is loss of Rs. 9,50,000 which will be carried forward to next assessment year.
Tax on Income from VDA is Rs. 78,000 (VDA will taxed at rate of 30% plus surcharge and cess @ 4%).
As per Section 115BBH of the Act, Loss arising from Transfer of VDA cannot be set off against income computed under any provisions of this Act. However, current Income-tax provisions is silent about whether loss other than from Transfer of Virtual Digital Assets can be set off against VDA Income. Income-tax provisions do not provide any clarification on this matter.
Therefore, net loss of Rs. 9,50,000 is not set off with Income from VDA of Rs 2,50,000.
4. Whether rebate under section 87A of the Act is available-
- Particulars of Income of individual –
- Income from Salary Rs. 3,00,000
- Interest income Rs. 50,000
- Income from transfer of VDA Rs. 1,00,000
Solution: As per Section 87A of the Act if a resident individual’s taxable income is upto Rs. 5 lakhs then they will get the benefit/tax rebate of Rs. 12,500 or the amount of tax whichever is lower.
The provisions relating to VDA are not clear whether the rebate under Section 87A can be claimed. This is a matter of clarification and should be considered thereof.
If rebate under Section 87A might be claimed on income from VDA then Tax as per the above example would be Nil as Total Income including income from VDA is Rs 4,50,0000 i.e. within the threshold limit prescribed for claiming rebate under Section 87A.
- Income from Salary Rs. 3,00,000
- Interest income Rs. 50,000
- Income from transfer of VDA Rs. 2,00,000
If rebate under Section 87A might be claimed on income from VDA then, Total income would be Rs. 5,50,000, therefore benefit of Section 87A would not be applicable as Total income exceeds Rs. 5,00,000. So Total tax on above income would be Rs. 67,600 (Tax on normal income upto Rs 2,50,000 is exempted. Tax over and above Rs. 2,50,000 is Rs. 5,000 as per slab rate for individual below 60 years and income from VDA is chargeable flat at 30% rate i.e. Rs. 60,000, plus surcharge and cess @ 4%)
If rebate under Section 87A not available on Income from VDA, then as per above example ,Total income for claiming Section 87A is Rs. 3,50,000, so no tax will be levied on total income other than income from VDA as it is below Rs. 5,00,000
Tax from VDA will be Rs. 62,400 (VDA will taxed at rate of 30% plus surcharge and cess @ 4%).
5. In the following circumstances, whether Section 44AD is applicable and income can be returned underestimated income scheme?
- Income from business is Rs. 1,90,00,000
- Income from transfer of VDA Rs.11,00,000
Section 44AD deals with Presumptive Taxation scheme for an eligible assessee engaged in eligible business. Income will be computed at rate of 6%/8% of the turnover or gross receipts. Eligible assesse and eligible business is defined under the Section 44AD of the Act. We are considering the possibility of holding VDA as capital asset, As far as taxation is concerned , Income from transfer of VDA is chargeable flat at rate of 30% as per Section 115BBH, therefore section 44AD will not be applicable over it. Therefore, here Section 44AD will be applicable on Income of business of Rs 1,90,00,000 and Section 115BBH will be applicable on Income from VDA of Rs. 11,00,000 In the following circumstances, whether tax audit is applicable?
i. Income from business is Rs. 90,00,000
ii. Income from transfer of VDA Rs. 11,00,000
As per Section 44AB of the Act, Every person carrying on business , if his sales or Gross receipts exceeds 1 crore/50 lakhs, get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant .Here, we are considering possibility of holding VDA as business assets, then in that case , sale proceeds from VDA should ideally be included for purpose of carrying out Tax Audit.
Since, Total Income from Business is Rs. 1,01,00,000, therefore Tax Audit under section 44AB is applicable.
More Clarity in Some points
The provisions relating to VDA is not clear whether the rebate under Section 87A can be claimed.
Treatment of loss due to devaluation of stock-in-trade of Virtual Digital Asset: This issue is not yet clear. There may be two possibilities that is devaluation may occur due to change in price of the assets at stock exchanges or if change in foreign exchange rates, if VDA purchased in any currency other than INR. Such notional losses may arise at the end of financial year of unsold stock of VDA. Issues may also arise at the time of sale of such VDA. Current Income-tax provisions do not provide any clarification on this matter.
Whether loss sustained by Assessee on sale or transfer of virtual digital assets prior to 31.03.2022 is allowed to be set off or carry forward: The law on this matter is not clear and there is ambiguity and Assessee should take decision on basis of facts and circumstances.
Section 115BBH of the Act, Loss arising from Transfer of VDA cannot be set off against income computed under any provisions of this Act. However, current Income-tax provisions is silent about whether loss other than from Transfer of Virtual Digital Assets can be set off against VDA Income. Income-tax provisions do not provide any clarification on this matter.
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