In line with the pre-budget expectation, the Finance Minister Nirmala Sitharaman has proposed scheme of taxation for virtual digital assets. The Budget 2022 has proposed sweeping changes in respect of taxation of likes of crypto-currency, non-fungible tokens ('NFT') and other such digital assets. There was significant ambiguity on the taxation of such products with taxpayers taking divergent views to offer the income arising from such products either as capital gains or income from other source.
Virtual Digital Asset - Defined
The definition of the 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 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 which it represents.
Taxation on Virtual Digital Asset transfer
With effect from 01st April, 2022, 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 case of 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 cost of acquisition of such virtual digital assets. Similarly, no set-off of loss arising from transfer of any virtual digital asset shall be allowed against any other income. Only a limited set off of losses from virtual digital asset is permitted against gain from another virtual digital asset in the same year. No carry forward of any losses from transfer of virtual digital asset is permitted.
Gifting of virtual digital asset is chargeable as income in the hands of the recipient under the head Income from other sources. Gifting of virtual digital asset may also result in taxation in the hands of transferor at the rate of 30% in the absence of any exemption.
It will be critical to watch out for valuation rules for such virtual digital asset 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 transfer of virtual digital asset to a resident at the rate of one per cent of consideration. The withholding tax provisions are applicable even if the consideration is partly or fully paid in kind. There is limited exemption provided for different classes of payers with low threshold of INR 10,000 and INR 50,000 per financial year.
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.
Clarity on taxation of virtual digital asset is a welcome move and India is perhaps few countries in the world to bring out a tax regime for such products. Interestingly, the government has not clarified its position under 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 virtual digital asset is not illegal but will never be recognized as legal tender.
This article was originally published on Taxmann.