Overview of Taxation of Virtual Digital Assets in India

Cryptocurrency, also known as digital currency or Virtual Digital Assets (VDA), emerged in India for the first time around 2009 in the form of Bitcoin. It is a form of currency or medium of Exchange similar to any currency, but it exists digitally or virtually and uses cryptography to secure transactions mainly backed by blockchain technology. Cryptocurrency has grown in popularity among investors to facilitate financial activities.

While there is uncertainty or lack of clarity relating to the legality/regulatory framework of Cryptocurrency in India, the new regime of taxation of VDA under the Income-tax Act, 1961 (ITA) was introduced vide Finance Act, 2022.

New Regime of Taxation of VDA under ITA

Tax on VDA

Under the new regime, the income from VDA1 is taxed at 30% plus applicable surcharge and cess. The income chargeable to tax is calculated as the sale consideration less the cost of acquisition, with no other deductions or allowances permitted.

A loss incurred on the transfer of a VDA may not be offset against any other income or carried forward to subsequent assessment years. Even the offset of loss from one VDA is not permitted against the income of another VDA.

Gifts

Any person receiving gifts of VDAs (other than from a relative or on the occasion of the marriage of the individual or under a will or by way of inheritance) exceeding INR 50,000 shall be taxable as Income from other Sources under the ITA2.

Definition of VDA

VDA is defined under the ITA3 to include any information or code or number or token (not being Indian currency or foreign currency) which meets certain conditions, non-fungible token (NFT) or any other token of similar nature, by whatever name called or any other digital asset, as the government may specify by notification.

The Central Board of Direct Taxes (CBDT) thereafter issued two notifications4, the first one to exclude certain assets from the definition of VDA and the second to define NFT for the purpose of taxation of VDA under the ITA. The assets notified to be excluded from the definition of VDA are:

  • Gift cards or vouchers or mileage points, reward points, or loyalty card being a record that may be used to obtain goods or services or a discount on goods or services.
  • Subscription to websites or platforms or applications.
  • NFT, whose transfer results in the transfer of ownership of the underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable, is excluded from the definition of VDA.

Withholding tax obligations

Any person responsible for paying consideration (in cash or in kind or in both) for the transfer of VDA to a resident is liable to withhold tax at source at 1%5 with effect from 1 July 2022. As such, the payment to a non-resident is not governed by this provision and will be governed by Section 195 of the ITA.

However, there shall be no TDS liability if the value of the consideration payable is not exceeding specified limits, in case of consideration payable by the specified person6, the limit is INR 50,000 and in case of consideration payable by a person other than the specified person, the limit is INR 10,000. Furthermore, if the tax is deducted under this section, there shall be no requirement to deduct tax under another section.

The ambiguities relating to the implementation of the above withholding provisions got clarified by CBDT vide Circulars7 which are summarized below:

Responsibility to withhold tax when VDA asset is transacted through Exchange8

  1. VDA owned by a person other than Exchange: Exchange shall be responsible for withholding tax. Where the transaction between the Exchange and the seller is through a broker, then the broker shall also be liable to withhold tax. However, only a broker can discharge the liability if an arrangement to that effect is entered between the broker and Exchange.
  2. b. VDA owned by Exchange: Buyer shall be responsible for withholding tax. However, Exchange can also discharge the liability provided an arrangement is entered on the same with the buyer.

How to discharge TDS obligation where consideration is in kind or in exchange for another VDA

The person responsible for paying such consideration (in kind) is required to ensure the payment of withholding tax by the seller before releasing the consideration. In case of exchange of VDAs other than through Exchange, both persons are buyer and seller for VDA exchanged. TDS needs to be deducted by both on each leg of VDA and furnish TDS return.

In a case where the exchange of VDAs is transacted through Exchange, Exchange can deduct tax if there is a written contractual agreement between the Exchange and buyer/seller.

  1. GST: TDS to be deducted on consideration, excluding GST.
  2. TDS deduction under Section 194O: Not required, as tax is deducted under Section 194S.
  3. Payment made through Payment Gateway (PG): Buyer will need to withhold tax at source, as PG is only a facilitator. PG needs to take an undertaking from the buyer relating to the discharge of TDS.

The new regime on taxation of VDA under ITA provides clarity and certainty on the taxation of VDA. However, there are certain aspects, like the valuation of VDA, on which there is no clarity provided under the ITA.

Taxation under Indirect Taxes

The GST Act 2017 does not clearly classify virtual digital currencies as ‘goods’ or ‘services’ to determine the levy. In its absence, they have been at the legal framework’s mercy to be classified as lottery, betting, and gambling. Accordingly, they could be considered as actionable claims.

On the other hand, cryptocurrency defies the identification as an actionable claim considering it does not give a right to recover the debt on the non-happening of a certain event. Furthermore, analyzing this reveals that buying and selling securities gives the person dealing in the crypto asset a right to sell the same on profit. Furthermore, until the profit element is not accrued, the owner can retain the virtual asset with them. Thus, giving them a similar nature of “transactions in shares” and not as an “actionable claim.”

While currently, GST is levied only on the part of the services provided by crypto exchanges, subjecting the whole transaction to tax at a higher slab of 28% could give the markets a free fall.

Considering this, the government, in consultation with the stakeholders, is working on a comprehensive indirect tax regime for cryptocurrencies, whereby it would define their characteristics, their use, and how they fit into the existing legal framework.

Our Comments

Cryptocurrency in India is growing and continues to remain popular among traders. However, clarity on the legality and regulatory framework is awaited. The new regime of taxation of VDAs under ITA is certainly a welcome move, and the similar clarity under GST law would help to determine whether virtual digital currencies can be considered as ‘goods’ or ‘services’ and also provide clarity on related aspects of the levy, place of supply, time of supply, and most importantly, the valuation.

1. Section 115BBH of ITA.
2. Section 56(2)(x) of ITA.
3. Section 2(47A) of ITA.
4. Notification No. 74/2022, dated 30 June 2022 under proviso to Section 2(47A), Notification No. 75/2022, dated 30 June 2022 under clause (a) of Explanation to Section 2(47A) of ITA.
5. Section 194S of ITA. Specified person means Individual/HUF where Gross Receipts/Turnover/Total Sales < INR 1crore in business, Gross Receipts < INR 50 lacs in profession as per the preceding Financial Year.
7. Circular Nos. 13 of 2022 dated 22nd June 2022 and 14 of 2022 dated 28th June 2022.
8. Exchange means any person that operates an application/platform for transferring of VDAs.

Tax Street December 2022