Budget 2022: Taxation of Virtual Digital Assets

Budget 2022: Taxation of Virtual Digital Assets

In line with the pre-budget expectation, Finance Minister Nirmala Sitharaman has proposed a taxation scheme for virtual digital assets. The Budget 2022 has proposed sweeping changes regarding the taxation of crypto-currency, non-fungible tokens ('NFT') and other such digital assets. There was significant ambiguity on the tax of such products, with taxpayers taking divergent views to offer the income arising from such products either as capital gains or income from other sources.

Virtual Digital Asset - Defined

The definition of virtual digital assets is wide enough to cover all types of crypto-currency, NFT either generated through cryptographic means or otherwise other than Indian or foreign currency.

Further, the Central government has been empowered to notify or exclude any other digital asset from this definition in the future. There is an interpretation possible that the proposed definition of "virtual digital asset" may potentially cover in its ambit assets other than crypto-currency and NFT such as digital vouchers, cards, token, code or number that represents value. It would be useful to clarify that virtual digital asset is only limited to crypto-currency.

Further, one of the industry expectations was that NFT shall not be classified along with crypto-currency but to be treated on par with "capital asset". This is based on the justification that NFT derives its value from the underlying asset that it represents.

Taxation on Virtual Digital Asset transfer

With effect from 01st April 2022, the transfer of any virtual digital asset shall attract income tax at the rate of 30%. This is a flat rate, and the benefit of slab rates in the case of an individual is not available. Further, no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed while computing this income other than the acquisition cost of such virtual digital assets. Similarly, no set-off of loss arising from any virtual digital asset transfer shall be allowed against any other income. Only a limited set off of losses from the virtual digital asset is permitted against gain from another virtual digital asset in the same year. No carry forward of any losses from the transfer of the virtual digital asset is permitted.

The gifting of a virtual digital asset is chargeable as income in the hands of the recipient under the head Income from other sources. Gifting virtual digital assets may also result in taxation in the hands of the transferor at the rate of 30% without any exemption.

It will be critical to watch out for valuation rules for such virtual digital assets to determine deemed transaction value.

Withholding tax on Virtual Digital Assets

The government proposes that with effect from 01 July 2022, tax is to be deducted on payment for the transfer of virtual digital assets to a resident at the rate of one per cent of consideration. There is a limited exemption provided for different classes of payers with a low threshold of INR 10,000 and INR 50,000 per financial year. The withholding tax provisions are applicable even if the consideration is partly or fully paid in kind.

Given the wide coverage of the obligator (individuals, non-resident or any other person), compliance of TDS provisions may not be practically enforceable especially for retail and small investors. Even for larger players, identifying the party on the other side can be challenging given that these virtual digital assets are mostly purchased and sold over third-party digital platforms. The government may need to consider shifting the responsibility of withholding to the platform on which such transaction takes place.

Conclusion

Clarity on taxation of the virtual digital asset is a welcome move, and India is perhaps within a few countries in the world to bring out a tax regime for such products. Interestingly, the government has not clarified its position under the Goods and Service tax on these products. The message seems to be clear that residents and small investors should stay away from these products. The government has also stated that trading in the virtual digital asset is not illegal but will never be recognized as legal tender.

 

 

 

Created & Posted by Pooja

Income Tax Expert at TAXAJ

 

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