India, with more than 10 crore investors, is the world’s most significant crypto market. But regulations have been confusing, and the government seems to have been caught unawares by the boom. For instance, it imposed a tax on cryptocurrencies but said that it does not mean they have been legalised. Investors are demanding that the government take a clear stand and that cryptocurrencies be legalised and regulated to pave the way for a solid, safe market. Rakesh Singh, a leading Blockchain and crypto lawyer, speaks to All Indians Matter.
As we all recollect that the Finance Act 2022 was passed with some changes to the Finance Bill introduced on February 1, 2022.
The Bill stated that a tax of 30% would be charged on income arising from Virtual Digital Assets w.e.f. April 1, 2022 and TDS @ 1% will become applicable w.e.f. July 1, 2022.
Pursuant to the above, the Central Board of Direct Taxes, Ministry of Finance, Department of Revenue, on June 22, 2022, came out with detailed guidelines for removal of difficulties under Section 194S(6) of the Income Tax Act, 1961.
Chapter XVII of the Income Tax Act, 1961 deals with provisions relating to collection and recovery of tax. A new Section (Section 194S) was introduced vide Finance Act, 2022 which provides for Payment on Transfer of Virtual Digital Assets. The said provision will become applicable for FY 2022-23 w.e.f. July 1, 2022.
The new section mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an amount equal to 1% of such sum as income tax thereon. The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier.
Provided that in a case where the consideration for transfer of virtual digital asset is:
(a) wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
(b) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax required to be deducted has been paid in respect of such consideration for the transfer of virtual digital asset.
This deduction is not required to be made in the following cases:-
(i) the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or
(ii) the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.
“Specified person” means a person,
If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.
A new TDS certificate in Form16E has been introduced. The buyer who deducts tax at the time of making payment will be required to issue Form 16E to the seller of VDA within 15 days from the due date of furnishing the challan-cum-statement in Form26QE.
It is pertinent to note that these guidelines will apply to cases where transfer of VDA is taking place on or through an Exchange and also other transactions like peer to peer and others, where the provisions of section 194S of the Act shall apply to the extent and in the manner as clarified by the CBDT.
Primarily the responsibility to deduct tax is of the buyer. Therefore in peer to peer transactions, the buyer is required to deduct tax. However, when the trades are being conducted through an exchange, the responsibility to deduct tax will vary depending on the parties involved (Buyer, Exchange or Broker) and the ownership of the VDA.
While TDS on loss making transactions is refundable, the inability to offset crypto losses against gains still needs to be addressed. The clarification issued by CBDT has come as a breather to the investors who are now in a position to invest and trade. This initiative by the Government will go a long way in creating an ecosystem for virtual digital assets which will be beneficial to all stakeholders.
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On Friday, March 25, 2022, the Lok Sabha passed the Finance Bill 2022. The Bill was passed with more than 30 changes in the Finance Bill as introduced on February 1, 2022. New amendments have been made and some proposed amendments have been removed or modified.
Some of the important provisions which the crypto investors must be aware before investing in Virtual Digital Assets are listed below:
A Virtual Digital Asset is defined under Section 2 (47A) of the Income Tax Act.
A virtual digital asset is proposed to mean 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.
TAXABILITY UNDER SECTION 115 BBH
Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of:
(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).
Notwithstanding anything contained in any other provision of this Act,
(a) no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and
(b) no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.
The tax on cryptocurrencies, will be separate from taxes levied on capital gains from other investments like investment in stocks and funds.
TAX DEDUCTED AT SOURCE (TDS):
1% TDS will be deducted by the buyer, on transfers of VDA, irrespective whether the transaction is at a profit or at a loss.
SET OFF AND CARRY FORWARD OF LOSSES
It is pertinent to note here that the loss from one kind of VDA cannot be set off against the gains from any transaction involving another VDA while computing tax.
No set-off and carry-forward of losses allowed to Virtual Digital Assets investors.
EXPENSES ALLOWED TO BE DEDUCTED FROM SALE VALUE
No Deduction (Other than cost of acquisition) in respect of any expenditure shall be allowed under any provisions of the Act.
Infrastructure costs incurred in mining of VDA (eg. crypto assets) will not be treated as cost of acquisition as the same will be in the nature of capital expenditure which is not allowed as deduction as per the provisions of the act.
TAXABILITY OF GIFT OF DIGITAL ASSET
Individuals who receive digital assets as gifts would also be taxed under the section 56(2)(x).
GST
In addition to the above income tax provisions, the Government is also working on classification of cryptocurrency under the Goods and Services Tax (GST) in order to levy tax on the entire value of transactions.
The current law does not have a clear classification for cryptocurrency and 18% GST is levied only on services provided by crypto exchanges categorized as financial services.
Clarity is awaited on levy of GST on cryptocurrencies and whether it would be levied on the entire value.
CONCLUSION
Meanwhile, the Indian government is working on cryptocurrency legislation. A crypto bill was listed to be considered in the winter session of Parliament but it was not taken up. According to reports, the Government needs more time to finalize the bill. The way the Indian Government has implemented the taxation of VDA’s, clearly indicates the Government’s intention of dissuading investors to invest in this volatile asset class and encourage investments in Government backed Central Bank Digital Currency which will be launched soon.
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