Income Tax on Virtual Digital Assets and CryptoCurrency in India

(Last Updated On: February 28, 2022)

Income Tax on Virtual Digital Assets and CryptoCurrency in India

Income Tax on Virtual Digital Assets and CryptoCurrency in India is imposed by Finance Bill 2022 ( Article by CA Satbir Singh . Contact Taxheal@gmail.com)

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Commentary on Income Tax on Virtual Digital Assets and CryptoCurrency in India

How will the virtual digital assets be taxed?

Budget presentation on 01 February 2022, has proposed to bring virtual digital assets under the tax net, i.e. under the Income-tax Act, 1961 of India.
From April 1, 2023, gains on transfer of Virtual Digital Assets / crypto asset shall be taxed at the rate of 30% (plus applicable surcharge and cess) under proposed section 115BBH of the Act.
While computing gains / loss on transfer of such virtual digital assets, no deduction for any expenses or any allowance shall be allowed barring the cost of acquisition.
Losses, if any, on transfer of crypto assets shall neither be allowed to be set off against any other income nor shall be allowed to be carried forward to subsequent years.
Defination of “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;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
“non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset
subject to such conditions as may be specified therein.
The expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them
in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.’.

Income tax on Gift of Virtual Digital Assets

Gifting of virtual digital assets will be taxed under Section 56 (Income from Other Sources) of Income Tax Act
Recipient of virtual digital assets shall be taxed, if the asset is received without any consideration (say, a gift) or for a consideration which is less than its fair market value.
The fair market value of the asset in excess of the consideration (Nil in case of a gift) shall be taxed under the head of income from other sources and at the rate applicable to the recipient (including surcharge and cess).

Deduction of tax at source on virtual digital assets

To capture every transaction detail, from 01 July 2022, the government has proposed that a purchaser, while making payment for transfer of virtual digital assets to a resident, will be required to deduct tax at the rate of 1% . This tax must be deducted at the time of payment or credit in the books, whichever is earlier.

NO TDS shall be deducted where aggregate payments made is of less than Rs.10,000 during the financial year. (in a case where payer is a specified person1, this limit is increased to Rs. 50,000.)

1. ‘specified person‘ means a person: ––

(i)		being an individual or Hindu undivided family whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
(ii)		being an individual or Hindu undivided family having income under any head other than the head ‘Profits and gains of business or profession’.

If the payment for such transfer is–

i.		wholly in kind or in exchange of another virtual digital asset where there is no part in cash; or
ii.		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 primary responsibility for tax payment by the seller is kept on the purchaser itself and the purchaser must ensure that tax has been paid in respect of the consideration.

Clarification Required

No clarity on following issues
- Interest income to be earned by staking of VDAs;
- Taxation of transactions with non-resident
- What will be norms for determination of fair market valuation given the volatile nature of the asset,
- Crypto currencies are mostly bought and sold in foreign currency. Accordingly, any increase or decrease in value of rupee will also result in gain or loss. How gain/loss arising from such fluctuation in rupee be treated at the close of the financial year, its mark-to-market provisioning etc.

Finance Bill 2022 provisions regarding Income Tax on Virtual Digital Assets

Amendment of section 2.

3. In section 2 of the Income-tax Act,––

(b) after clause (47), the following clause shall be inserted, namely:––
‘(47A) “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;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset
subject to such conditions as may be specified therein.

Explanation.––For the purposes of this clause,––
(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them
in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.’.

Amendment of section 56.
16. In section 56 of the Income-tax Act, in sub-section (2),––
(a) in clause (viib), in the Explanation, in clause (aa), after the words and figures “Securities and Exchange Board of India Act, 1992”, the words and figures “or regulated under the International Financial Services Centres Authority Act, 2019” shall be inserted with effect from the 1st day of April 2023;
(b) in clause (x),––

….

(ii) for the Explanation, the following Explanation shall be substituted with effect from the 1st day of April, 2023, namely:––
‘Explanation.––For the purposes of this clause,––
(a) the expressions “assessable”, “fair market value”, “jewellery”, “relative” and “stamp duty value” shall have the same meanings as respectively
assigned to them in the Explanation to clause (vii); and
(b) the expression “property” shall have the same meaning as assigned to it in clause (d) of the Explanation to clause (vii) and shall include virtual
digital asset.’.

Insertion of new sections 115BBH

Tax on income from virtual digital assets.

28. After section 115BBG of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2023, namely:––

‘115BBH. (1) 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).

(2) 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.

Insertion of new section 194S.

Payment on transfer of virtual digital asset.

59. After section 194R of the Income-tax Act, the following section shall be inserted with effect from the 1st day of July, 2022, namely:––

‘194S. (1) Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, 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, deduct an amount equal to one per cent. of such sum as income-tax thereon:

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 has been paid in respect of such consideration for the transfer of virtual digital asset.

(2) The provisions of sections 203A and 206AB shall not apply to a specified person.
(3) Notwithstanding anything contained in sub-section (1), no tax shall be deducted in a case, where––

(a) 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

(b) 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.

(4) Notwithstanding anything contained in this Chapter, a transaction in respect of which tax has been deducted under sub-section (1) shall not be liable to deduction or collection of tax at source under any other provisions of this Chapter.

(5) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

(6) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the prior approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
(7) Every guideline issued by the Board under sub-section (6) shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person responsible for paying the consideration on transfer of such virtual digital asset.

(8) Notwithstanding anything contained in section 194-O,in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted under sub-section (1).
Explanation.––For the purposes of this section “specified person” means a person,–

(a) being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him
does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
(b) being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”.’.

Memoradum on Finance Bill 2022

Scheme for taxation of virtual digital assets
Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill.

2. The proposed section 115BBH seeks to provide that where the total income of an assessee includes any income from transfer of any virtual digital asset, the incometax payable shall be the aggregate of the amount of income-tax calculated on income of transfer of any virtual digital asset at the rate of 30% and the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of the income from transfer of virtual digital asset.

2.1 However, 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 the Act while computing income from transfer of such asset.
2.2 Further, no set off of any loss arising from transfer of virtual digital asset shall be allowed against any income computed under any other provision of the Act and
such loss shall not be allowed to be carried forward to subsequent assessment years.

2.3 This amendment will take effect from 1 st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

3. Further, in order to widen the tax base from the transactions so carried out in relation to these assets, it is proposed to insert section 194S to the Act to provide for
deduction of tax on payment for transfer of virtual digital asset to a resident at the rate of one per cent of such sum. However, in case the payment for such transfer is–
(i) wholly in kind or in exchange of another virtual digital asset where there is no part in cash; or
(ii) 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 before making the payment shall ensure that the tax has been paid in respect of such consideration.

3.1 In case of specified persons, the provisions of section 203A and 206AB will not be applicable. Further, no tax is to be deducted in case the payer is the specified
person and the value or the aggregate of such value of consideration to a resident is less than Rs. 50,000 during the financial year. In any other case, the said limit is
proposed to be Rs. 10,000 during the financial year.

3.2 It is also proposed to provide that if tax has been deducted under section 194S, then no tax is to be collected or deducted in respect of the said transaction under any other provision of Chapter XVII of the Act.
3.3 Furthermore, in any sum paid for transfer of virtual digital asset is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum to the account of the payee and the provisions of section 194S shall apply accordingly.

3.4 It is proposed to empower the Board to issue guidelines, with the prior approval of the Central Government, to remove any difficulty arising in giving effect to the
provisions of the said section and every such guideline issued by the Board shall be laid before each House of Parliament, and shall be binding on the income-tax
authorities and on the person responsible for paying the consideration on transfer of such virtual digital assets.

3.5 It is also proposed to provide that in case of a transaction where tax is deductible under section 194-O along with the proposed section 194S, then the tax
shall be deducted under section 194S and not section 194-O.

3.6 For the purposes of the said section, it is proposed to provide that ‘specified person’ means a person:––
(i) being an individual or Hindu undivided family whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him
does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in
which such virtual digital asset is transferred;
(ii) being an individual or Hindu undivided family having income under any head other than the head ‘Profits and gains of business or profession’.

3.7 This amendment will take effect from 1 st of July, 2022.

4. Further, in order to provide for taxing the gifting of virtual digital assets, it is also proposed to amend Explanation to clause (x) of sub-section (2) of section 56 of the Act to inter-alia, provide that for the purpose of the said clause, the expression “property” shall have the meaning assigned to it in Explanation to clause (vii) and shall include virtual digital asset.

4.1 This amendment will take effect from 1 st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

5. To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted to section 2 of the Act. As per the proposed new clause, 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.

5.1 Central Government may notify any other virtual digital asset as virtual digital asset by way of notification in the Official Gazette. The Non-fungible tokens means
such digital assets as notified by the Central Government. Further, Central Government can notify such assets which shall not be considered as virtual digital
assets for the purposes of the proposed section.

5.2 These amendments will take effect from 1st April, 2022.

[Clauses 3, 16, 28 and 59]

Also refer Govt Income tax Website

Income Tax on Virtual Digital Assets & CryptoCurrency in India