Budget 2022: Virtual digital assets are here to stay, says expert

India is emerging as one of the world’s fastest-growing markets for cryptocurrency trading with user base of estimated two million. As stated by finance minister in her budget speech, RBI is expected to create a Central Bank Digital Currency (CBDC), on the lines of China’s Central Bank.

Budget 2022 has provided for taxing rights effective April 1, 2022 under section 115BBH by defining comprehensively the term Virtual Digital Assets (VDA) under the Income tax act under a Chapter dealing with Tax on Special Cases, providing for a flat rate of 30 percent. To ring fence the compliance circle, withholding tax of 1 percent has been prescribed under section 194S as also enforce a tax on VDA’s which are gifted.

The regulations have further clarified that no deduction would be allowed for other than the original cost of acquisition and have also specifically clarified that losses if any, arising from dealing in VDA would not be entitled to be carried-forward.

While the finance minister clearly explained that “taxing that does not actually bring legitimacy”, it is also clear that the country would not want to ban the trading in cryptocurrency and is expected to conclude its stakeholder conclusions before introducing the bill in parliament to regulate VDA.

Seen globally, in terms of tax regulations, UK does not consider VDA’s as currency or money but as a commodity. In Singapore as well as in Hong Kong, the tax treatment for the holder of digital token depends on the characterization of the token, the method of receipt/ disposal of the tokens, and the circumstances surrounding the receipt/disposal.

With the proposed amendments in the Indian Income tax act, we are staying clear of such interpretations whether ‘VDA’ represents an ‘Intangible asset’, ‘trading asset’ or ‘capital asset’ and will have a simple tax code which when applied with applicable surcharge and cess, would take the overall taxes on VDA upto 42.74% for the Super-rich.

We are left with some open issues which need clarifications on the VDA. For instance, where an employer or start up pays a portion of the remuneration in as VDA, whether the same shall be taxable as salaries? Hongkong for instance provides that VDA’s received as employment income should be reported at their market value and subject to the same salaries tax treatment as regular remuneration. With the current legislation, such salary in the form of VDA’s are most certainly to be treated as a perquisite under section 17 of the Act; suitable clarifications from CBDT would help.

Whether Tax Treaty benefits would be available to the non-residents on gains made from investing in VDA’s in India. Further, whether cost of mining the cryptos or foreign exchange fluctuation will be as a deduction against the revenue generated.

Another question is how computation mechanism for sale of ‘Non-Fungible Tokens’ would work, since these are essentially self-generated assets, unlike the cryptos traded in the platforms. History of taxation has shown us rulings where Capital gains taxation was struck down by the Courts where the Computation mechanism fails. Whether there is a possibility of the revenue invoking section 69 for transactions entered in the past dealing with un-explained investments, necessitating taxpayers to have proper documentation. Also what shall be the GST implications on VDA’s going forward considering that the Budget proposals have only clarified the position on taxation under the income-tax law.

To conclude by virtue of the budget 2022, investors dealing in VDA will have to pay taxes in India computed at 30 percent with applicable surcharge (ranging from 10-37 percent) & expect suitable regulations which will further govern and impact the trades made on such assets.

Whether the tax proposals will result in glut of supply of VDA into the market following a heavy sale to avoid tax or whether it would shift investments from this asset class into equity markets, which have the benefit of lower taxation remains to be seen.