Taxation of Virtual Digital Asset

Legality of Virtual Digital Assets (VDAs) In India:

VDAs are not illegal in India but they are not recognized as legal tender. In 2018, the RBI had placed a banking ban on cryptocurrency transactions, prohibiting banks from dealing with entities involved in VDAs. However, the Supreme Court of India overturned this ban in March 2020, stating that the prohibition was unconstitutional.

The Reserve Bank of India (RBI) thereafter has clarified that VDAs will not be considered as a medium of exchange or store of value in the same way as the Indian Rupee.

Though there is no specific legal framework for VDAs, the Indian government began regulating VDAs, through taxation measures. The Finance Act, 2022

(i) Introduced Section 2(47A), providing definition for Virtual Digital Assets (VDAs)

(ii) Introduced a new section 115BBH to tax the income derived from transferof VDAs. As per the provisions of this section, such income is to be taxed @ 30%

(iii) Transaction related to transfer of VDAs brought under the ambit of TDS provisions. Section 194S was introduced whereby Tax is required to be deducted @ 1% of transaction value, exceeding certain thresholds.

(iv) Notification and circulars were issued to bring the clarity in respect of newly introduced tax provisions.

These provisions and clarifications are discussed below:

Definition of VDA under Income Tax Act: Section 2(47A)

A Virtual Digital Asset (VDA) is defined as:

(a) A Virtual Digital Asset refers to any type of digital item like data, code, numbers, or tokens (excluding Indian or foreign currency) that is created using cryptography or other methods. It represents value that can be exchanged with or without payment. This digital value can be used in financial transactions or investments, stored, traded, or transferred electronically.

(b) It includes non-fungible tokens (NFTs) or any other token, regardless of its name.

(c) Any other digital asset that the Central Government may declare as a VDA through official notification.

Explanation to S. 2(47A):

• A non-fungible token (NFT) refers to a digital asset specified by the government.
• The terms currency, foreign currency, and Indian currency retain their definitions as outlined in the Foreign Exchange Management Act, 1999.

Taxation of VDAs: S. 115BBH of income Tax Act:

S. 115BBH (1): Income from the transfer of VDAs is taxable at a flat rate of 30% (plus applicable surcharge and cess). This is irrespective of the individual’s tax slab.

S. 115BBH (2):

• Except for the cost of acquisition, no deduction is allowed for any expenses incurred.
• Losses incurred from the transfer of VDAs cannot be set off against any other income.
• Losses from VDAs cannot be carried forward to future years.

Gift of VDA: (Section 56(2)(x)

VDA has been included in the definition of “property” for the purpose of S. 56, w.e.f 01/04/2023. Thus, when VDA is received as a gift, it will be taxable as “Income from Other Sources” in the hands of recipient, unless the same gets exempted under the exceptional clause of receipt of gift from relatives or gift on certain occasions.

TDS provisions on transfer of VDAs: S. 194S:

When a person (buyer) makes a payment to the seller for transfer of a VDA:

• Tax is required to be deducted by a person responsible for making payment (i.e. Buyer)
• Tax is to be deducted at the time of credit or payment, whichever is earlier.
• Rate of TDS is @ 1% of the total transaction value.
• TDS is applicable even if the transfer of VDA is in kind or partly in kind and partly in cash.
• For the specified taxpayers (i.e. Individual or HUF who are subject to tax audit), TDS provisions will apply when the payment is above ₹10,000 in a financial year.
• For the persons other than specified taxpayers (i.e. Individual or HUF who are not subject to tax audit), TDS provisions will apply when the payment is above ₹50,000 in a financial year.

CBDT Guidelines

Circular 13/2022 dated 22nd June, 2022

The Central Board of Direct Taxes (CBDT) is empowered by Sub-section (6) of Section 194S of the Act to issue guidelines for resolving difficulties, subject to the approval of the Central Government. Pursuant to this authority, the CBDT has issued guidelines through Circular 13/2022 dated 22nd June, 2022, specifically addressing transactions conducted on or through an Exchange

• Definition of Exchange and Broker:

(i) Exchange: Any person who operates a platform for VDA transfers, matching and executing buy/sell trades.

(ii) Broker: Any person who operates a VDA transfer platform and holds an account with an exchange to execute trades.

• Transfer of VDA through an Exchange and the VDA being is owned by a person other than the Exchange: In this case buyer is making payment to the Exchange and exchange is making payments to seller/broker. Since there are multiple players in the transaction,

(i) Exchange is to deduct the tax before making the payment to the seller.

(ii) If the VDAs are owned by the broker, exchange is to deduct the tax before making the payment to the broker.

• Transfer of VDA through an Exchange and the VDA being transferred is owned by Exchange: In VDAs transaction, the buyer bears primary responsibility for tax deduction. However, when the VDAs are being owned by the Exchange, the Exchange may execute a written agreement with the buyer, assuming responsibility for paying taxes. Exchange in this case is required to submit the statements of such transactions quarterly in form no. 26QF, before the due date.
• Transactions where the consideration is received in the form of another VDA: In this scenario, both the parties are buyer and seller. TDS rules are applicable on each of them while transferring their VDAs.
• TDS issues when the transaction takes place in kind (i.e. when the form of VDAs) through exchange:

(i) Exchange should deduct 1% TDS from both Virtual Digital Assets (VDAs) being traded, and then transfer the balance to the respective seller.

(ii) As trading has taken place in VDAs and there is no involvement of cash, the exchange in this case should deduct the tax in the form of one of the primary VDAs [Bitcoin (BT), Ethereum (ETH) etc.]. The primary VDAs so retained by the Exchanges is then to be converted into INR at the market rate by placing a sell order.

• Once tax is deducted under section 194S of the Act, there is no applicability of section 194Q of the Act.
• TDS is to be made on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.
• In transactions where payment is being carried out through payment gateways, the payment gateway need not to deduct tax. However, the gateway may require an undertaking from the payer to facilitate this transaction.
• Transactions credited or paid before April 1, 2022 are exempt from tax deduction.

Circular 14/2022 dated 28th June, 2022

• For consideration other than in kind, Section 194S of the Act mandates tax deduction for transferring Virtual Digital Assets (VDAs).
• In peer-to-peer transactions (buyer to seller, without an Exchange), the buyer must deduct tax and deposit it with the Government as per prescribed time and procedure.
• The deductor must furnish a quarterly statement (Form 26Q, or Form 26QE for specified persons) for all such transactions by the due date.
• When transactions is partly in Kind and partly consideration is received in the form of another VDA, the person responsible for paying the consideration must ensure the required tax is paid before releasing the consideration. Buyer will only release the balance consideration after the seller provides proof of tax payment, such as challan details.

Notifications 74/2022 dated 30th June, 2022

The following digital assets are excluded from being considered VDAs:

1. Gift cards or vouchers: These are records used to obtain goods or services or receive discounts.

2. Mileage points, reward points, or loyalty cards: These are issued without direct monetary consideration under promotional programs and can only be redeemed for goods or services or discounts.

3. Subscriptions to websites or platforms: These digital records are also excluded from the VDA definition.

Notification 75/2022 dated 30th June, 2022

It specifies the scope of Non-Fungible Tokens (NFTs) as VDAs. However, NFTs related to tangible assets, where the transfer results in a legal change of ownership of the underlying asset, are excluded from the VDA definition.