By Shivanand Pandit
For many years, speculation was widespread that cryptocurrencies will be prohibited in India. In the past, the government and the Reserve Bank of India (RBI) have warned against treating cryptocurrencies as legal tender. The fact that dealings utilizing such currencies can certainly sidestep the tax net and therefore be used for unlawful transactions have been troubling governments across the world.
The government’s decision to tax cryptos and other virtual digital assets and lay down ground rules for the purpose in the recent budget is a welcome step. This erases vagueness about the tax treatment of virtual assets and establishes a money trail for the authorities to follow. Now, the next step should be to design a law to regulate them.
The Union finance minister during her presentation of the budget proposed to levy a tax of 30% and Tax Deduction at Source (TDS) of 1% on any income derived from the transmission of any virtual digital asset. However, after presenting the budget, the minister mentioned at a press conference that discussion is in progress with stakeholders on digital assets and there is no clarity yet on how the government of India will legalize or regulate cryptocurrencies.
In 2018, the RBI instructed banks not to offer services to the cryptocurrency ecosystem. Nevertheless, the Supreme Court set this aside, branding the move uneven given that such currencies were not prohibited in the country. A statute on cryptocurrencies, which was supposed to have been brought in the previous year, is yet to see the light of the day. The comprehensive anticipation about the government’s approach to this was set by a 2019 report by an inter-ministerial committee which recommended a ban on all cryptocurrencies.
Nonetheless, crypto investments have witnessed an enormous surge. By the ecosystem’s own disclosure, over 10 crore Indians already owned crypto assets by 2021, hinting at a penetration level comparable to shares and mutual funds. The Finance Bill 2022 that was tabled in Parliament a few days ago did not make any official declaration about legalizing it, still, it has announced a new taxation regime for the class of “virtual digital assets” (VDAs) comprising cryptocurrencies and non-fungible tokens (NFTs). Although cryptocurrencies, such as Bitcoin and Ethereum, are yet to get recognition from the government, people are trading in digital assets in huge numbers. This has apparently compelled the government to introduce a tax on such transactions.
Many crypto investors were delighted although the government included crypto assets in the ambit of capital gain with a hefty tax and they assumed that it would legalize crypto assets. Unfortunately, my guess that the budget announcement makes crypto assets “legal” is totally misunderstood. Income is taxable regardless of how the income was earned. For instance, the Supreme Court’s verdict in the Commissioner of Income Tax vs Piara Singh in 1980 quoted from the judgment in Commissioner of Income Tax, Gujarat vs SC Kothari, in which the Court had observed that “if the business is legal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute.”
The Finance Bill 2022 defined VDA by inserting a new clause (47A) to Section 2 of the Income Tax Act. According to the suggested new clause, a VDA is proposed to mean 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 which is 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 and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically. VDAs also comprise NFTs, which are cryptographic possessions on a blockchain with distinctive identification codes and metadata that differentiate them from each other. NFTs can also be utilized to represent individuals’ identities, property rights, and more. This differs from fungible tokens like cryptocurrencies, which are identical to each other, and therefore, can be used as a medium for commercial transactions.
The government has for the first time offered an explanation for crypto assets and specified a list of proposals on the taxation of this new asset class. In addition to a blanket tax of 30% and a TDS of 1%, the government has also proposed that except for the cost of acquisition, no deduction will be permitted. Moreover, losses arising from transfer of crypto assets cannot be set off against any other sources of income. However, losses in one crypto can be set off against gains in another within the same financial year while assessing gains. Surcharge will be applicable on the tax computed on the transmission of digital assets where total income is more than Rs 50 lakh and cess will be applicable in all cases. However, the government did not explain if digital assets will be a currency, commodity, or security.
Due to such ambiguity, VDA should be classified as a capital asset and any gains arising on the transmission of such asset shall be taxable as capital gains. No TDS is applicable if the payer is the specified person not subject to tax audit, such as an individual or Hindu undivided family and aggregate value of consideration is less than Rs 50,000 during the financial year. In other cases, no TDS is applicable if the consideration does not exceed Rs 10,000 in aggregate during the financial year.
A non-resident is taxed in India on income that is received or deemed to be received in India or is deemed to accrue and arise in India. Location of digital assets in the case of a non-resident can be a matter of controversy given the virtual exchange environment. Gifting of digital assets will be taxable in the hands of the recipient if the value of assets exceeds Rs 50,000. However, in case these are received from the relatives as defined, the income will not be taxable. However, guidance is awaited on valuation of such assets.
Nations across the world have taken contradictory opinions regarding crypto assets. Few nations, such as China, have debarred digital assets altogether. In contrast, countries like El Salvador have welcomed the new technology and announced it as their legal tender. Countries that are in favour of crypto assets are either incorporating revisions to their current tax policies or passing a separate law for tackling queries relating to such assets. In Singapore, the Payment Services Act of 2019 legalizes crypto and has provisions to stop unlawful activity. Businesses involved in buying and selling digital tokens are taxed on the profit derived from trading in digital token and no taxes are levied if gains accrue from disposal of digital tokens held as long term investments. Thus, Singapore has given VDA the status of a capital asset, unlike India.
The US and Canada also interpret cryptocurrency as a capital asset. Subject to the nature of transactions, the UK imposes capital gains tax or income tax on crypto gains. The Australian government predominantly considers crypto as an asset for capital gains tax purposes.
Nations like Germany and Portugal have marginally relaxed taxation regulations in place for cryptocurrencies. In Germany, cryptocurrency is considered to be a private asset attracting an individual income tax rather than capital gains tax only if it is disposed of in the year it was purchased. In Portugal, crypto income is only taxable if it accrues from professional trading activity. Further, no tax is levied on the exchange of cryptocurrency for other currency which implies that buying or selling cryptocurrencies would not be subject to capital gain taxes or value added tax.
India now needs to enact a separate law to legalize digital assets by way of a comprehensive crypto bill. No currency regulating organization will be able to deal with cryptocurrencies unless a crypto bill permits them to do so.
Numerous cryptocurrency dealings take place on a peer-to-peer basis or on overseas platforms, and meticulous work may be required by the tax department to detect counter-parties and determine jurisdiction over such trades. It is also essential that the centre brings in legislation to explain its position on the legality and regulatory status of cryptocurrencies and other virtual assets before more investors start speculating on them.
As crypto may render itself as the future of currencies across the globe, well calibrated clarifications would help in stopping any bad impact on trading and investments in VDA in India. If the government delays the process of legalizing cryptos, it would lead to disaster and will serve as a breeding ground for money laundering. The proliferation of dark sites could increase the challenges faced by the government.
The writer is a financial and tax specialist, author and public speaker based in Margao, Goa