Taxation on 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 considering the magnitude of transaction in digital assets a new scheme to provide for taxation of such virtual digital assets has been proposed in the Finance Bill 2022

Sections of Income Tax Act 1961 Covering Virtual Digital Assets

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

clause (47), the following clause shall be inserted, namely:––

(47A) “virtual digital asset” ––

• Amendment in Section 56
• Insertion of new section 115BBH
• Insertion of new section 194S

Detailed Discussion

Definition:

Section 2(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.’.

Key Points

Government has first time officially termed digital assets including Cryptos assets under Virtual Digital Assets. these comprise all the cryptos as Bitcoin, Ethereum, etc and any other non-fungible tokens (NFT) or any other digital assets as Central Government may notify. Coins used in the games are not covered in the definition of Virtual digital assets u/s 2(47A)

Taxation of Income From Virtual Digital Assets

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.

Key Points

• Applicable from Assessment Year 2023-24

• Taxable @30% (Excluding surcharge and Cess),

• No deduction in respect of any expenditure (other than cost of acquisition)
• No 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.
• 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.

Insertion of new section 194S.

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”.’.

Key Points

Applicable from 01^st July 2022

TDS to be deducted by any person responsible for paying to resident any sum by way of consideration for transfer of VDA

TDS to be deducted by person responsible for paying consideration on transfer of VDA at the rate of 1% subject to following limits Where consideration of VDA is partly in cash and partly in kind or wholly in kind or in exchange of another VDA, person responsible for paying consideration shall recover taxes before transfer of VDA

Meaning of person responsible to pay consideration is a wider term and would include buyer as well as third party intermediaries like exchange platforms

Any person responsible would include non-residents as well as foreign companies operating foreign exchange platforms

Where person responsible for paying consideration is specified person, provisions of section 203A relating to obtaining TAN and section 206AB does not apply

Where TDS is deducted under section 194S, no TDS is applicable under any other section of this Chapter

Clear guidelines required w.r.t valuation of VDA, Highly volatile in values across the exchanges on single day

Amendment in Section 56

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. 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.