“Any income from transfer of any virtual digital asset shall be taxed at 30 percent,” Finance Minister Nirmala Sitharaman announced in her Budget 2022-23 speech in Parliament on February 1, 2022. The announcement paves the way for crypto assets to be taxed in India, marking a shift in the government’s approach towards cryptocurrencies.
“The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime,” Sitharaman said during her speech, noting that there had been a “phenomenal increase” in the transaction of virtual digital assets.
It is one of the most significant announcements from the Indian government which hints at their strategy towards dealing with crypto assets and non-fungible tokens (NFT).
Does a tax on virtual digital assets legitimise cryptocurrencies?
In her post-budget press conference, Sitharaman said that the Reserve Bank of India will issue currencies. Consultations are underway and all the questions surrounding crypto and crypto assets will be clear only after the conclusion of stakeholder consultation, she added. The Indian government is yet to clarify how it plans to regulate crypto assets. When asked about why taxation has been proposed before regulation, Sitharaman said, “I cannot wait for regulation to come in to tax people who are earning a profit.”
Are cryptocurrencies an asset or currency?
Sitharaman said that currency becomes a currency if it is issued by the central bank even if it is crypto. “We loosely refer to cryptocurrencies, they are not currencies. Currencies are with the central bank. We are not taxing currencies that are yet to be issued. The RBI will come up with a digital currency. Everything that prevails outside of it are assets created by individuals,” she said in response to a question.
Finance Secretary T.V. Somanathan* stressed in an interview that cryptocurrencies such as Bitcoin, Ethereum, or NFT will never become legal tender. “Crypto assets are assets whose value will be determined between two people. You can buy gold, diamond, crypto, but that will have not have the value authorization by government,” the finance secretary said. He added that people investing in private crypto should know that there is no guarantee of an investment reaping gains, and that the government should not be blamed for losses.
What is a virtual asset?
The Indian government has amended the Income Tax Act, 1961 to provide the definition of what constitutes a virtual digital asset.
What is a Virtual Digital Asset which attracts 30% tax ?
— Bar & Bench (@barandbench) February 1, 2022
A ‘virtual digital asset’ means –
- 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 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;
- a non-fungible token or any other token of similar nature, by whatever name called;
- any other digital asset, as the Central Government may, by notification in the Official Gazette specify.
However, 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.
How will TDS be applied on transactions?
Sitharaman said that there will be one percent tax deducted at source (TDS) on payments made for the transfer of digital assets in order to capture transaction details.
Crypto tax: All sales taxed at 30%. No deductions of brokerage etc. allowed. No set-off against any other losses allowed (Is this reading right: you can't even set off losses in other crypto transactions) pic.twitter.com/MpwpvSPleA
— Deepak Shenoy (@deepakshenoy) February 1, 2022
A new section 194R will be added to the Income Tax Act, effective from July 1, 2022, which elaborates:
“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
1. wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
2. 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,” according to a copy of the Finance Bill 2022.
This means that any transaction in which someone acquires crypto assets in lieu of crypto assets or cash, will be subject to TDS. The responsibility of paying the tax will rest with the buyer of these assets.
- Crypto exchanges may end up paying TDS: “While the aforesaid withholding provision should technically be applicable on the buyer of VDAs and crypto exchanges (marketplace) should not be considered as ‘person responsible for paying consideration’, the obligation to withhold tax under section 194S may practically be on crypto-exchanges,” as per an analysis issued by Nishith Desai & Associates. The firm added that it is possible in the future that the ‘person responsible for paying consideration’ may not be the exchange or the platform, owing to decentralised finance and evolution of smart contracts.
- It is liquidity tax which cuts tradability of crypto: Deepak Shenoy, Founder and CEO, capitalmind.in, explained that there will be TDS on every single transaction because when you are selling there is no guarantee that the sale is happening to an account that is your own. “They may force each exchange to cut TDS. It is essentially a 1 per cent effective liquidity tax and not transaction tax because the money will go straight to the government and they will only pay it back to you a year later,” He added: “It’s like taking your money away for a year and then saying one did not have to pay this tax. I’ll give you your money back after cutting the tradability of crypto effectively. A lot of market-making crypto applications are dead and I have a feeling that this blueprint might be copied by a few other countries.”
Will the loss on sale of virtual assets be allowed to set off against any income?
The loss from the sale of virtual digital assets will not be allowed to be set off against any other income, the government announced. It has also ruled out deductions and exemptions in expenditure while computing income, except for the cost of acquisition.
The finance bill states the following:
- 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; and
- No set off of loss from transfer of the virtual digital asset 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.
What if you gift someone virtual digital assets?
The finance minister said that the gifts of virtual digital assets will be taxed in the hands of the recipient at 30 percent.
From 10 year jail imprisonment to 30% crypto tax.
— Crypto India ? (@CryptooIndia) February 1, 2022
How did Indian crypto exchanges react to the announcement?
Most crypto exchanges welcomed the announcement. These provisions will come into effect from April 1, 2022.
Taxation will legitimise the crypto industry: Nischal Shetty, Founder and CEO of WazirX, told MediaNama that it was a huge relief to see the government adopting a progressive stance on crypto. “The government legitimises the industry to a large extent by bringing in taxation. The majority of people, especially corporates, who have been sitting on the sidelines because of uncertainties will now be able to participate in crypto,” he said. He noted that “it was interesting” that the government is recognising crypto by referring to it as a virtual digital asset, solidifying crypto’s emergence as an asset class.
“We hope this development removes any ambiguity for banks, and they can provide financial services to the crypto industry.” — Nischal Shetty
Taxation of Virtual Digital Assets or #crypto is a step in the right direction. It gives a lot of clarity
India's focus on digital innovation and promotion of blockchain is welcome
The details need to be studied to comment further
But it's great news for crypto investors in India
— Sumit Gupta (CoinDCX) (@smtgpt) February 1, 2022
Will work with government to bring crypto taxation at par with other classes: “The regulatory guidance on tax from the government furthers the mainstreaming excitement of crypto. It is also the gateway to the future decentralised world, aka Web 3.0. The budget shows the government’s intent to take a business-friendly approach while protecting the interest of consumers and the exchequer. We hope to work with the government to help bring crypto-asset taxation at par with other asset classes,’’ said Ashish Singhal, Founder and CEO, CoinSwitch and Co-chair Blockchain and Crypto Assets Council (BACC).
Singhal’s comments indicate that the rate of taxation might be a touch too high. Moreover, they also suggest that he would like the rate to be brought down to be consonant with other asset classes. For example, income from the sale of equity shares and mutual funds is taxed at 15.60 percent in the short term and 10 percent in the long run.
TDS will help authorities track crypto transactions: Melbin Thomas, Co-founder, Sahicoin, was of the opinion that the government’s move “will change a lot of misconceptions around crypto assets and pave the way forward to classifying them as a separate asset class”. He also added that the TDS is likely to help authorities track crypto transactions and provide visibility on the holders of crypto assets.
How will NFTs be impacted by the rate of taxation?
WIll cause huge friction in the initial stages: Keyur Patel, Co-Founder and Chairman of GuardianLink and BeyondLife.Club, said that the lumping of virtual assets (crypto and NFTs) creates a one-sided tax implication as opposed to using crypto as a traceable asset and NFTs or Gaming Virtual Goods as entertainment assets/collectable assets like digital music or digital art. “Lack of deductions implies huge friction initially until the user base understands that all asset classes must be taxed for holistic economic growth. It will create a major roadblock for the investor community in the space but this, too, shall evolve,” he bemoaned.
Taxation will be burdensome on NFTs: “It is version 1.0 of the framework while we understand regulation to control other elements of crypto are required, NFTs are a nascent field and will have to adjust to grow the ecosystem with such taxation. NFTs are still classified as non taxable assets worldwide, and it is imperative that the adjustment in understanding that crypto tokens are different than digital NFT is taken into consideration for future amendments and allow industries like gaming, interactive immersive museums and other edutainment NFT frameworks to succeed without tax burden,” Patel suggested.
What will be the implications of this announcement?
Tax rate might not be the best outcome: Rishi Anand, Partner, DSK Legal, said that a flat 30 percent tax rate may not be the best outcome as it does not consider aspects of long- and short-term gains calculated according to the holding period of such assets.“Taxation on buying and selling of NFTs is still unclear, but likely to follow the same tax regime. In the trade of digital assets, determining the identity of the payee is a challenge, and therefore transparency and disclosure on digital assets transactions is something which the government will look at from the exchanges/platforms,” Anand said. He also said that gifting digital assets may not become mainstream since it is also subject to a flat 30 percent bracket.
- May not discourage trading: On the other hand, some believe that the flat tax rate of 30 percent may not be a deterrent in trading and investing at this stage. Nakul Batra, Associate Partner, DSK Legal opined that this move gives the government affirmation, which was lacking before, for better adoption of the digital assets.
- Discourages transactions: Ritesh Kumar, Partner, IndusLaw said that the move was not in line with what the industry was expecting and that “the 30 percent rate of tax and restriction to set-off losses is a very bold move in discouraging transactions in crypto.”
By taxing virtual digital assets, GOI has legalized crypto trading in India. So crypto as a commodity is now ok, but it still can't be used as a currency (ie – long term value is still zero!)
So will be interesting to see how the w3 market reacts for now.
— Sameer.Nigam (@_sameernigam) February 1, 2022
Taxation rate is punitive in nature: Rishi Anand’s views were echoed by Sameer Jain, Managing Partner, PSL Advocates & Solicitors who termed the announcement as “punitive in nature”. “Not allowing any deduction or set-off against losses to calculate tax on crypto gain is not in line with the tax regimes around. Trading in crypto has been, in essence, declared as an isolated transaction for an individual, which will be taxed irrespective of the overall losses,” he said.
Focus on fine print to understand definition: Rajat Prakash, Managing Partner, Athena Legal, believes the proposed tax regime to be a step forward in removing uncertainty and ambiguity with respect to trading. “However, one would need to read the fine print especially the definition of virtual digital assets to understand the exact implications of the announcement,” he said.
If someone thinks by taxing cryptocurrencies, government is legitimising it; he may be in for a disappointment. In India, taxes are payable even on illegal income.
— D.Muthukrishnan (@dmuthuk) February 1, 2022
No clarity on cryptocurrency: Finance Secretary T.V. Somanathan said that it was government’s policy to tax all income except agriculture. “We don’t have clarity on cryptocurrency if it’s business income, capital gain or speculative income. Some people declare their crypto assets, some don’t. Now uniform rate will be 30% tax,” he said. Somanathan reasoned that crypto is a speculative transaction because of which the government was taxing it 30 per cent. “No one knows the real value of Ethereum. Their rate fluctuates daily.” he said while comparing crypto investment to horse racing which is also taxed at 30 per cent.
Will ITR Forms have a separate column for crypto income?
Crypto income disclosures will have to be marked in a separate column which will appear in the Income Tax Return (ITR) forms from next financial year, as per an interview with Revenue Secretary Tarun Bajaj.
He clarified that gains from crypto assets were always taxable and the budget merely brought clarity to the issue.
“The provision in the Finance Bill is related to taxation of virtual digital assets. It is to bring certainty in taxation of cryptocurrencies. It does not convey anything on its legality which would come out once the Bill (on regulating such assets) is introduced in Parliament,” he was quoted as saying.
Bajaj added that individuals dealing with crypto will have to cough up 30 per cent plus applicable cess and surcharge of 15 per cent on income above Rs 50 lakh on income accrued from cryptocurrencies,
He also explained the government’s rationale behind offering no deductions by elaborating that the state does not believe cryptocurrencies and virtual digital assets have any economic value except the underlying technology.
*Update: The post was updated following editorial input
*Update: The comments by Finance Secretary T.V. Somanathan were added on February 2 at 5:30pm
*Update: The comments by Revenue Secretary Tarun Bajaj were added on February 3 at 5:20pm
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