d cryptocurrency can be taxed

Currently India has introduced a new scheme of Taxing Digital Assets ( including Crypto), however, there are many grey areas like how to deal an international transactions, position in Foreign exchange Management Act,1999(FEMA) etc. So Currently any income from transfer of digital asset( Including Crypto) is taxable at 30%.Further gifting of the asset also attracts tax in india.

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 All About Taxation of Crypto Currency

For the easy understanding i have divided the answer into 2 part. Part 1 is summary for quick understanding. If you are interested in deep understanding i have explained the provision in part 2.

Part 1. Taxability

a) Income arising from transfer of virtual digital assets will be taxable at the rate of 30%. If you add surcharge and cess, the effective tax rate may rage from 34% to 42.7%. This is applicable to the income arising from 1st April 2022 and onwards.

b) No deduction of any expenditure( except cost of acquisition) or allowance shall be allowed from the income earned. Further no set-off of any loss to the assessee under any provision shall be allowed against this income.

c) Any loss arising from the transfer of Virtual digital asset shall not be allowed to set off against any other source of income, and the same cannot be carried forwarded to subsequent assessment years.

d) There is a TDS liability on payment made in relation to transfer of virtual digital asset at 1% on payment made in excess of threshold limit( Rs 10,000 in case the payment made by other than specified person and Rs.50,000 in case of specified person)

e) Tax shall also be charged in the hands of recipient in case the virtual digital asset is gifted.

There is no clear cut provision to deal with transactions entered between intermittent period.

Part1. Legality

It is to be noted that the income tax law is to tax income arising to a person. Merely an income is brought into the tax net does not provide a legality or legitimacy to the source of such income. The primary function of the Income Tax Act is to bring the income of various kinds into the tax net. The Income Tax authorities are not concerned about the manner or means of acquiring income(The income tax Act considers the income earned legally as well as tainted income alike.)

Further Finance Minister has clarified the same in an interaction with select print media journalist. Finance minister made it clear that taxing digital assets does not make them legal and she told that the consultation under way for putting in place a regulatory frame work for digital assets. Hence, till such regulation come into force we cannot comment whether this is legal or not.

Part 2 Provisions as per the Finance Bill 2022

1.What is the scope of taxability?

The finance Act,2022 propose to brought in a section called Section 115 BBH with the heading Tax on income from virtual digital assets. As per Section 115BBH(1)(a) provides that the amount of income from transfer of virtual digital asset shall be taxed at the rate of thirty per cent.

a) What is meant by Virtual digital asset?

As per the proposed clause (47 A) to Section 2 of the Income Tax Act,1961 “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 to be noted that the government is introducing a Central Bank Digital Currency( CBDC) so this may be excluded from the above definition of Virtual digital assets.

Further Subsection 2 of Section 115BBH is a non obstante clause which means this provision will override the entire sections of this Act.

it provides that” 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.”

Hence the entire receipts reduced by the cost of acquisition will be taxed at 30 % plus cess and surcharge as applicable. If the resulting figure is negative then such loss cannot be set off against other source of income and it cannot be carried forwarded to subsequent assessment years.

2. Tax Deducted at source

The bill proposes to insert a section 194S to the Income tax act to deduct tax at source from the amount payable in respect of transfer of virtual digital assets.

“‘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:……

…….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.

….(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.

It is to be noted that these are proposed provisions only. These may be changed based on the discussions in both the houses of parliament

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