TAXATION OF VIRTUAL DIGITAL ASSETS
Prior to the 2022-23 budget speech in India, there were no laws regulating the buying and selling of cryptocurrencies. However, due to the significant increase in transactions involving virtual digital assets, the Finance Minister announced the need for a specific tax regime. As a result, various provisions were added and amended in the Income Tax Act, 1961 to regulate investments in cryptocurrencies and address the concerns of the growing number of stakeholders in this field.
Meaning of virtual digital asset [Section 2(47A)]
It 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;
The non-fungible token means such digital asset as may be notified by the Central Government.
Accordingly, the Central Government has, vide notification no. 75/2022 dated 30.6.2022, specified a token which qualifies to be a virtual digital asset as non-fungible token. However, it shall not include a non-fungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.
(c) any other digital asset, as may be notified by the Central Government.
However, the Central Government may, by notification, exclude any digital asset from the definition of virtual digital asset subject to specified conditions.
Accordingly, the Central Government has, vide notification no. 74/2022 dated 30.6.2022, notified that the following virtual digital assets would be excluded from the definition of virtual digital asset–
(i) Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
(ii) Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
(iii) Subscription to websites or platforms or application
Taxability of income from transfer of virtual digital assets [Section 115BBH]
1. Income from of transfer of virtual digital assets will be taxable @ 30% under section 115BBH.
2. No deduction allowed while computing the income from transfer of virtual digital assets, except for Cost of Acquisition.
3. No setoff of any losses of assessee would be allowed from such income.
4. Loss from transfer of VDA would not be allowed to setoff against any other income of assessee and such loss would not be allowed to be carried forward in succeeding assessment years.
5. The definition of transfer would be applied to any VDA whether capital assets or not.
Taxability of receipt of virtual digital asset as gift or for inadequate consideration [Section 56(2)(x)]
Section 56 of Income tax Act, 1961 has been amended to include Virtual Digital Assets within definition of property. Accordingly,
If VDA is received by any person from any person
Without Consideration: Aggregate FMV of VDA taxable as income of recipient, if exceeds Rs. 50,000.
Inadequate Consideration: If difference between aggregate fair market value and such consideration exceeds Rs. 50,000, such difference would be taxed as the income of the recipient.
However, the exclusions from the applicability of section 56(2)(x) will apply to gift virtual digital asset also.
TDS on payment on transfer of virtual digital asset [Section 194S]
1. Rate of TDS
Section 194S requires any person who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset to deduct tax @1% of such sum.
2. Time of deduction:
Time of credit of consideration to the account of the resident or,
At the time of payment of such sum by any mode
Whichever is Earlier.
3. Cases where the consideration for transfer of virtual digital asset is wholly in kind or partly in kind and partly in cash –
In a case where the consideration for transfer of virtual digital asset is
- wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
- 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 has to, before releasing the consideration, ensure that tax required to be deducted has been paid in respect of such consideration for the transfer of virtual digital asset.
4. Non applicability of TDS under section 194S –
No tax is required to be deducted under section 194S,
where the consideration is payable by Specified person, being an individual or a Hindu undivided family whose total sales, gross receipts or turnover from his business or profession does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred, and the consideration for such VDA does not exceeds Rs. 50,000.
where the consideration is payable by any person other than Specified person mentioned in (i) above, and consideration does not exceeds Rs. 10,000.
The provisions of section 203A containing the requirement of obtaining TAN and section 206AB requiring higher rate of TDS for non-filers of income-tax return would not be applicable in case of specified person referred in point (i) above.
5. Due dates:
(i) Time of payment of deducted TDS to Government Account [Rule 30]
(a) For specified person, 30 days from the end of the month of deduction.
(b) For other person (Including Exchange), on or before 7 days from the end of the month of deduction. In case of tax deduction for March, on or before 30th April.
(ii) Furnishing of Statement of TDS return u/s 200(3) [Rule 31]
(a) For specified person, TDS return to be filed in Form 26QE, within 30 days from the end of the month of deduction.
(b) For any other person (other than exchange), TDS return to be filed in Form 26QF and for exchange in Form 26Q within time limit specified below:
(iii) TDS Certificate [Rule 31A]
(a) For specified person, Form 16E to be furnished within 15 days from the due date of furnishing TDS return in 26QE.
(b) For other person (Including Exchange), Form 16A to be furnished within 15 days from the due date of furnishing TDS return in 26QF/ 26Q.
Points to be noted:
1. TDS shall be deducted on consideration for transfer of virtual digital asset less GST. [Clarified by the CBDT vide circular no. 14/2022 dated 28.6.2022]
2. In case of a transaction where tax is deductible under section 194-O along with the section 194S, then, the tax shall be deducted under section 194S and not section 194-O.
CBDT has, with the prior approval of the Central Government, vide Circular no. 13/2022 dated 22.6.2022, issued the guidelines to provide clarity on following situations:
1. When a virtual digital asset is transferred through an exchange and owned by someone other than the exchange:
In such cases, the buyer pays the exchange, which in turn is required to pay the owner of the asset. It has been clarified that tax may be deducted under section 194S only by the exchange that is making the payment to the seller or owner of the asset. If a broker owns the asset, they are considered the seller, and the amount paid to them is also subject to tax deduction under section 194S. If the exchange and seller use a broker for the transaction, both the exchange and broker are responsible for deducting tax, unless they have a written agreement stating that the broker will be responsible for tax deduction. The exchange must file a quarterly statement for such transactions.
2. When the transfer of virtual digital asset takes place on or through an Exchange and the virtual digital asset being transferred is owned by such Exchange:
It has been clarified that if the asset is owned by the exchange, the buyer is required to deduct tax under section 194S, but there may be difficulties in determining ownership. To address this, the exchange can enter into a written agreement with the buyer or broker to pay the tax instead. The exchange must provide a quarterly statement and include the transactions in its income tax return to avoid the buyer or broker being held in default.
3. When the consideration for transfer of virtual digital asset is in kind:
It has been clarified that the buyer would release the consideration only after the seller provides proof of payment of tax. If the transaction is through an Exchange, the Exchange may deduct tax for both legs of the transaction based on a written contractual agreement with the buyers/sellers. In this case, the buyer and seller would not be required to follow the procedure prescribed under proviso to section 194S(1) independently. The tax withheld in kind under section 194S would be deposited in the Government Account as per the timeline and process given in the Income-tax Rules 1962. No further TDS would be required for converting the tax withheld in kind into INR or from one virtual digital asset to another virtual digital asset and then into INR.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
CA Pranay Jain