The Indian Government has been thoroughly focussing on digitalisation as part of it’s India governance. Be it the Digital India programme and integration of ministries on digital platforms or mandating data localisation in India, the Government does not seem to be leaving any stone unturned to embrace technological developments and innovations to the fullest. The amendments in Indian tax laws in line with OECD’s BEPS recommendations on addressing the challenges of digital economy has reflected the Government’s intent of staying well in the regulating the technological evolution in businesses done in India. Now, in keeping with the reality of digital currencies, the Government cleared the air reasonably well by mandating the Reserve Bank of India to issue Digital Rupee as a e-currency exchangeable for cash as the predominant physical currency. Therefore, what clearly emanates from the Government conduct is it’s desire to embrace the economic trends albeit by also regulating the same, as may be necessary.
From a taxation perspective, there has been significant amendments (as mentioned above) to contain the digital evolution of businesses – be it equalisation levy, significant economic presence, modification of source rules, OIDAR regulations under GST, India has been seeing it all. The crypto currencies have been talk of the town in India for quite some time now. Crypto Currencies (eg. Bitcoin, Ethereum, etc.), Non-Fungible Token (NFT) Digital Art, etc. have been gaining phenomenal attention from the investors community. The trading of these digital assets is facilitated through various crypto virtual platforms across the globe (eg.Binance, WazirX, Aurox, Rarible, etc.) which facilitate trading of such currencies. Studies say that WazirX (virtual platform dealing with trading of crypto currency) has gross trading turnover $43 billion in 2021. The primary income for the traders/ investors dealing in crypto currencies has been through transfer of such VDA. However, such income was outside the purview of income tax so far With the introduction of the digital rupee, the Government has now proposed to levy tax on this type of digital asset as one of the mechanisms to regulate the crypto-currency market. It must however be appreciated that the Government has not introduced a taxation mechanism only for crypto currencies but for a wider segment of digital assets christened as “Virtual Digital Assets”.
In the next few paragraphs, we will make an attempt to focus on what’s proposed in the Finance Bill 2022 with respect to the Virtual Digital Assets (VDAs) and certain initial reactions which surface based thereon.
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Taxability of Virtual digital asset (VDA)
The Finance Minister – Miss Nirmala Sitharaman in her possibly on of the most capitalist Budget of 2022 has proposed to bring income on VDA under the income tax net with effect from AY 2022-23.
It is proposed to introduce a new section 115BBH wherein the said Trading incomeshall be taxed at the flat rate of 30%. The Finance Bill 2022 defines a VDA seemingly in a exhaustive manner u/s 2(47A) of the Income Tax Act 1961 (“the Act”) as follows, although the contours of the meaning appear extremely wide.
A virtual digital asset means 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 are included in the definition.
It suggests the following allowances and disallowance of expenditure / losses as deduction in computation of such income from VDA:
| Allowances | Disallowances |
| Cost of acquisition of the VDA |
|
Income From Virtual Digital Asset – Capital Gains or Income from Other Sources?
Since only the cost of acquisition is allowed as deduction, the Income from VDAs appears to be categorized as “Income from Capital Gains”. However, looking closely, the provisions are also similar to section 115BB – Winnings from the Lottery, Crossword Puzzle, Race, Games etc. under the head “Income from Other Sources”. Thus, this impasse in categorization of the Trading Income under the head of “Income from Other Sources” or “Capital Gains” needs further analysis and preferably a clarification for ease of investors in such assets.
Withholding Tax on total consideration on transfer of Virtual Digital Asset
The Finance Minister has also announced provisions of withholding tax under section 194S at the rate of 1% of the total consideration on transfer of VDA for the following Assessee:
| Assessee | Total consideration exceeding per financial year (INR) |
| An individual or Hindu undivided family whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred | 50,000 |
| An individual or Hindu undivided family having income under any head other than the head ‘Profits and gains of business or profession’ | |
| Any other case | 10,000 |
In addition to the above, for in-kind transfer of the VDA, the Budget proposes the transferee to ensure compliance of tax deposit by the transferor.
Following are couple of primary concerns with respect to the withholding tax to be addressed by the Government / CBDT:
Identification of Seller: Since the transaction is traded on online platforms, how will the buyer identify the seller?
Valuation of in-kind transfer: Where the transfer of VDA is under a barter arrangement, the valuation of the VDA shall be determined basis the Fair Market Value (FMV). The rules regarding FMV of the VDA needs to be prescribed under the law.
Virtual Digital Asset as Gift
VDA is now included in the definition of property under section 56(2)(x). Thus, gifting of VDA shall be taxed under the head of “Income from Other Sources”.
While the Government has tried to clear the air around taxation of crypto currencies through this new VDA tax regime, the following considerations also continue to merit closer look by taxpayers in the digital space:
1. What are digital assets?
2. How is a VDA different from a digital asset?
3. Squarely basis the first two aspects which assets get covered for the definition of VDA u/s 2(47A) of the Act
4. What is the interplay between VDA tax / equalisation levy / SEP tax, when looked at from the perspective of taxpayers, especially non-residents and those dealing in intangibles, knowhows, licences?
Unambiguous clarifications and responses to the above issues and more as may ensue, would be critical to contain protracted litigations in India on the said counts.
(The Article is Co-authored by Risha Gandhi (Manager) and Zainab Bookwala (Senior Manager) from Deloitte.)
