BY MALINI BHUPTA
INCOME EARNED from transacting in digital assets will attract a capital gains tax of 30% and tax deducted at source (TDS) of 1% will be levied, the government said on Tuesday. Finance minister Nirmala Sitharaman clarified, cryptocurrencies were not being legalised adding a committee has been tasked to come up with rules and regulations. The tax will make transacting in digital assets such as cryptocurrencies and NFTs (non-fungible tokens) costlier from FY23. While computing income from the transfer of digital assets, no deduction with respect to any expenditure or allowance will be permitted. Further, gifting of any virtual asset will also be taxed.
Virtual digital assets have captured the imagination of many new-age investors in recent times and in order to capture the transaction details, TDS will be levied at 1% on payment made in relation to transfer of virtual digital assets. The withholding tax could affect the flow of money into these assets as it will significantly increase the tax burden. Says Deepa Suresh, partner – Tax and Regulatory Services, BDO India, “With an announcement of taxing virtual digital assets at 30% without allowance of any expenses (except cost of acquisition) coupled with non-allowance of carry forward of loss from sale of such assets and making withholding tax applicable, the government has provided a clear view enabling the elimination of uncertainty around the same.”
While experts say that taxing these assets is a step in the right direction, the withholding tax of 1% may spoil the party for cryptocurrency traders. The government is not treating this as a priority sector as it is proposed to be taxed at ordinary income marginal rate. However, a 1% withholding tax would impact tax collections because compliance would curtail investments.
According to Rahul Garg, national direct tax leader, Price Waterhouse & Co LLP, says, “It would yield revenue from this new sector if the transactions do not get frustrated. A 1% TDS in high frequency and value transactions appears too high. Also proposals need to clearly provide implementable TDS system, else the transaction may get frustrated leading to loss of revenue.”
Experts believe that the TDS structure would need to be rationalised or substituted by giving tax identifier details of parties and requiring TDS only where parties do not have a tax identifier. Regulating these assets has more upside than downside. Rakesh Bhargava, director, Taxmann, says the announcement would bring relief to the central bank and security agencies.
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