Union Budget 2022 has clarified the position of taxation of cryptocurrencies in India under the Income-tax Act, 1961 (‘Act’). Finance Bill, 2022 has introduced various provisions to tax cryptocurrencies in India. For this purpose, cryptocurrencies are included in the definition of ‘Virtual Digital Assest’ (VDA), a new concept introduced by the Finance Bill, 2022. A bare reading of the provisions makes it clear that cryptocurrencies are not ‘currency’ as such but are ‘financial products’ and is taxed accordingly.
Introduction
Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets have 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.
Scheme for Taxation of virtual digital assets alias Cryptocurrencies in India in the Budget Speech of the Finance Minister
While presenting the Budget 2022, Finance Minster has discussed the scheme for the taxation of cryptocurrencies in India in para 131 of the Budget Speech. The said para is reproduced below-
Scheme for taxation of virtual digital assets
131. There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.
● No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition.
● Further, loss from transfer of virtual digital asset cannot be set off against any other income. Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold.
● Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.
Summarised Provisions of Tax on Virtual Digital Asset
1. Any income from the transfer of any virtual digital asset shall be taxed at a special rate of 30 per cent. This is proposed to be made applicable from Assessment Year 2023-24. (It seems to be a drafting error since the intention is to tax it from AY 2022-23 which might be corrected while passing the Finance Bill).
2. No deduction in respect of any expenditure or allowance shall be allowed while computing the income from the transfer of any virtual digital asset. However, cost of acquisition of the VDA will be allowed to be deducted from the consideration received on the transfer of VDA.
3. Loss from the transfer of virtual digital assets cannot be set off against any other income. Such loss shall not be allowed to be carried forward to subsequent assessment years. The thumb rule is ‘tax on profits’, ‘loss is yours/dead loss’.
4. Gift of VDA is shall be taxed in the hands of the recipient if received for inadequate or without consideration.
5. TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold introduced.
6. Except for the special tax rate @ 30% on the income on transfer of VDA and tax on gift of VDA, all other above provisions are proposed to be made applicable from AY 2022-23. Other provisions will apply from AY 2023-24.
7. Specific sections 2(47A), 115BBH, and 194S are proposed to be inserted in the Act by Finance Bill 2022 for the taxation of VDAs. Existing section 56 is proposed to be amended for taxing the VDAs in the hands of the recipient in certain circumstances.
Section 2(47A): Definition of Virtual Digital Assets
Finance Bill, 2022 has not defined the term crypto-currency but defines the term “virtual digital asset”.
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 tokens and; any other token of similar nature are included in the definition.
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 mean 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.
For this purpose, clause 3 of the Finance Bill, 2022 inserts the definition clause in the following manner-
Amendment of section 2.
3. In section 2 of the Income-tax Act,––
(a) ....
(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.’.
Explaining the proposed provisions of section 2(47A)
Clause 3 seeks to amend section 2 of the Act relating to definitions.
It is proposed to insert a new clause (47A) to the said section to define the expression “virtual digital asset” to mean,–
(a) 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 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 may be notified by the Central Government in the Official Gazette in this behalf,
It is further proposed to provide 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.
It is also proposed to define certain expressions for the purposes of the said clause.
These amendments will take effect from 1 st April, 2022.
Section 56: Tax on Gift of Virtual Digital Assets
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.
For this purpose, clause 16 of the Finance Bill, 2022 proposes to amend section 56(2)(x) in the following manner-
Amendment of section 56.
16. In section 56 of the Income-tax Act, in sub-section (2),–
(a)....
(b) in clause (x),–
(i).....
(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.’.
Explaining the proposed amendment in the provisions of section 56(2)(x)
Clause 16 seeks to amend section 56 of the Act relating to income from other sources.
Sub-section (2) of the said section provides that certain incomes as provided therein shall be chargeable to income-tax under the head “Income from other sources” without prejudice to the generality of the provisions of sub-section (1) thereof.
The existing provisions of clause (x) of sub-section (2) of the said section of the Income-tax Act, 1961 (the Act) inter alia, provides that where any person receives, in any previous year, from any person or persons any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum shall be the income of the person receiving such sum.
Explanation to clause (x) of the said sub-section provides that for the purposes of the said clause, the expressions “assessable”, “fair market value”, “jewellery”, “property”, “relative” and “stamp duty value shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).
It is proposed to amend the said Explanation to include the definition of the expression “property” to have the same meaning as assigned to it in clause (d) of the Explanation to clause (vii) and shall include virtual digital asset.
This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
Section 115BBH: Special Rate of Tax on income from transfer of Virtual Digital Assets
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 income-tax 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.
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.
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.
For this purpose, clause 28 of the Finance Bill, 2022 proposes to insert a new section 115BBH to provide for special provisions for taxation of VDA in the following manner-
Insertion of new section 115BBH
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.
Explaining the proposed provisions of section 115BBH
Clause 28 seeks to insert new section 115BBH relating to tax on income from virtual digital assets.
Sub-section (1) of the proposed new section 115BBH seeks to provide that 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).
Sub-section (2) of the said section seeks to provide that notwithstanding anything contained in any other provision of the Act,––
(a) no deduction in respect of any expenditure (other than the cost of acquisition) or allowance or set-off of any loss shall be allowed to the assessee under any provision of the Act in computing the income referred to in clause (a) of sub-section (1); and
(b) no set-off of loss from the 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 the Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.
This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
Section 194S: TDS on Virtual Digital Asset
Finance Bill, 2022 proposes to tax on virtual digital asset transactions and thus in order to capture the details of the transactions, section 194S is proposed to be inserted into the Act to provide for deduction of tax on the transfer of virtual digital asset (VDA).
Read more on Changes in TDS and TCS Provisions by Finance Bill, 2022
In order to widen the tax base from the transactions so carried out in relation to these VDA 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 1% 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.
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.
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.
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.
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.
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.
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’.
For this purpose, Clause 59 of the Finance Bill, 2022 proposes to insert a new section 194S to provide for TDS on transfer of virtual digital assets.
Insertion of new section 194S.
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:–
Payment on transfer of virtual digital asset
‘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”.’.
Explaining the provisions of Section 194S for TDS on transfer of virtual digital asset
Clause 59 seeks to insert a new section 194S in the Act relating to payment on transfer of virtual digital asset.
The proposed sub-section (1) seeks to provide that any person responsible for paying to a resident any sum by way of consideration for the 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.
It is further proposed to provide a proviso therein that in a case where the consideration for transfer of the 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.
The proposed sub-section (2) seeks to provide that provisions of sections 203A and 206AB shall not apply to a specified person.
The proposed sub-section (3) seeks to provide that 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; and
(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.
The proposed sub-section (4) seeks to provide that notwithstanding anything contained in Chapter XVII of the Income-tax Act, 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 provision of the said Chapter.
The proposed sub-section (5) seeks to provide that 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.
The proposed sub-section (6) seeks to provide that 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 purpose of removing the difficulty.
The proposed sub-section (7) seeks to provide that 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.
The proposed sub-section (8) seeks to provide that 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 to the said section seeks to provide that for the purposes of the said 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”.
This amendment will take effect from 1st July, 2022.
In the nutshell, the threshold limit for TDS on VDA u/s 194S for various persons are as follows-
Government Clarification on Taxation of Virtual Digital Assets
The government has clarified that loss from the transfer of virtual digital assets (VDA) will not be allowed to be set off against the income arising from transfer of another VDA while computing the total income and the tax liability. Crypto-currency comes under the definition of virtual digital assets introduced by the Finance Bill, 2022.
It is also clarified that 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 allowable as deduction as per the provisions of the Act.
This clarification was given by the Minister of State for Finance Shri Pankaj Chaudhary in response to a question raised in the Parliament (Loksabha) on 21st March, 2022.
Read the article Govt Clarifies No Set-off of Loss from One Crypto Currency with another Crypto Gain
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