The Finance Bill, 2022 has proposed a new Scheme for Taxation of Digital Assets such as Cryptocurrencies & NFTs.
It may be duly noted that Transactions in Cryptocurrencies and NFTs were taxable in earlier years as well. The classification of Income under Heads of Income such as Business or Capital Gains or Other Sources with varying rates (Slab rates, Specified Rates for LTCG) or what constitutes crypto transactions for Tax purpose has been dealt with in the proposed Finance Bill along with a specified rate of Income Tax (30%)
The Bill proposes to insert Section 2(47A) to define “Virtual Digital Asset” means
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value 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 including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
The section also empowers the Central Government, by notification in the Official Gazette, to ::
(a) specify any other “digital asset” as a VDA.
(b) exclude any “digital asset” from the definition of VDA.
(c) to define “NFT”.
The Bill also proposes a new section 115BBH relating to tax on income from virtual digital assets.
1. The amount of Income Tax on the income from transfer of a virtual digital asset shall be computed at the rate of 30% of such Income.
1A. Surcharge & Cess, as applicable, based on status & income of assessee, shall also be added.
2. For the purpose of computing Income from transfer of VDA, no deduction of any expenditure except cost of acquisition or set off of loss under any other head of Income or any allowance shall be allowed.
For example, Loss from Business or unabsorbed depreciation or Loss from House Property (say due to Interest on Self Occupied House Property) cannot be set-off against Income (Gains) from Transfer of Virtual Digital Asset.
3. Any loss arising from Transfer of VDA shall not be allowed to be set-off against any other head of Income. Also there will be no carry forward to succeeding years of any loss on Transfer of VDA.
The Bill also proposes a new Section 194S to provide for TDS on payment to a Resident of consideration for Transfer of VDA.
1. Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall deduct TDS @1%.
2. When – at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier.
3. Monetary Thresholds
(a) Rs 50,000/- aggregate in a Financial Year in case of Individual or HUF not having any Income from Business or Profession or if having Income from Business or Profession, turnover or gross receipts from Business is less than 1 crore in case of business and 50 lakhs in case of profession. Further section 203A and 206AB shall not be applicable.
(b) Rs 10,000/- aggregate in a Financial Year in case of other assessee.
4. Transfer of VDA for non-cash consideration or in exchange of another VDA
The person responsible for paying the consideration in kind or in exchange of another VDA shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.
1. The definition of VDA as proposed is exhaustive. However, the list of Digital Assets that are to be considered as VDAs can be expanded or excluded by the Central Government by notifications in Official Gazette.
2. Essentials of a VDA as per Definition.
a. any information or code or number or token (not being Indian currency or foreign currency),
b. generated through cryptographic means or otherwise,
c. by whatever name called,
d. providing a digital representation of value exchanged with or without consideration,
e. with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and
f. can be transferred, stored or traded electronically;
3. Transfer is defined under section 2(47) of the Income Tax Act, 1961. The CBDT has vide circular no. 751 dated 10-02-1997 clarified the expression “transfer” does not include lending.
4. The proposed Scheme for Taxation of Virtual Digital Asset is in no manner an imputation that the Government has legalised the transactions in VDAs. It is well-settled under the Tax Jurisprudence that “Illegality tainted with the earning has no bearing on its taxability. “
5. Fungible vs Non-Fungible.
“Fungible” has been defined in the Shorter Oxford English dictionary on Historical Principles as “said of thing which is the subject of an obligation when another thing of the same or another class may be delivered in lieu of it”. In contrast, “Non-fungible” means something which is unique and cannot be exchanged for anything else.
An example of a Fungible Token is popular cryptocurrency Bitcoin which can simply be exchanged for another Bitcoin. However, a NFTs cannot be exchanged for a like-for-like basis as each one is unique.