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The wait for the most awaited amendment if finally over.The Finance Act 2022 has finally introduced a taxation mechanism on crypto currencies and crypto assets.
This article will give you a brief overview about how crypto currencies and crypto assets will be taxed in India.
Firstly, it is important to understand where the crypto currencies and crypto assets are defined.A new clause in section 2 of the Income tax Act 1961 (Act) i.e.Section 2(47A) has been introduced to define Virtual Digital Assets (‘VDA’) whose relevant extract is reproduced hereunder:
VDA means:
A.An Asset satisfying all the below conditions
ii) 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)
B.
A non-fungible token or any other token of similar nature, by whatever name called
C.Any other digital asset, as the Central Government may, by notification in the Official Gazette specify
From the above definition different type of crypto currencies and crypto assets like Bitcoin, Ethereum, Litecoin, NFTs, various other digital tokens etc.would get covered under its ambit.
Now the taxability of VDA has been provided in another newly introduced in Section 115BBH of the Act (Applicable from FY 2022-23), which provides tax rate @ 30% (excluding surcharge and cess) on transfer of VDA.
Cost of acquisition shall be allowed as deduction, however no incidental expenses (eg.Brokerage cost) shall be allowed as deduction.
Loss on sale of VDA shall be adjusted against gain on other VDA e.g.Loss on Dogecoin can be adjusted against the gains made on Bitcoin.Carry forward of loss shall be also be not allowed and therefore, set off is possible only in the current year itself.
Income from VDA is taxed at special rates under Chapter XII of the Act.If a person’s total income comprises solely of income from VDA, then the benefit of unexhausted basic exemption limit is also not extended.
A newly inserted section 194S provides for the tax deduction on payment of VDA.
Tax has to be deducted by the buyer responsible, being a resident person @ 1% .No tax has to be deducted if:
|Particulars||Transaction Value|
|Buyer being Ind/HUF having carrying on business or profession, where total sales does not exceed Rs.
1 crore for business and Rs.50 lacs for profession in FY immediately preceding the year in which VDA is transferred||Does not exceed Rs.50,000 during the FY|
|Ind/HUF not having any income from business or profession|
|Other than above person||Does not exceed Rs.10,000 during the FY|
The buyer of VDA is not required to obtain Tax deduction and collection account number (TAN) as provisions of section 203A will not be applicable.
Some scenarios of the above TDS provisions can be understood better with the help of the below:
|Person||Turnover preceding yr.||Transaction Value||Analysis||Tax Deduction @ 1%|
|Mr.A – Proprietor||Rs.
12 lakhs||Rs.2 lacs||Income from business /profession does not exceed threshold limit||Rs.2000|
|Mr.
B – Proprietor||Rs.45 lacs||Rs.30,000||No TDS since transaction value does not exceed Rs.50000|
|Mr.C – Proprietor of a CA Firm||Rs.85 lacs||Rs.80,000||Income from business/profession exceed threshold limit||Rs.800|
|Mr.
D – Proprietor||Rs.3 crores||Rs.6000||No TDS since transaction value does not exceed Rs.10000|
|Mr.D – Employee||No business income||Rs.25,000||Transaction Value below threshold limit (Rs.50000)||No TDS|
|Mr.E – Employee||No business income||Rs.
1 lac||Transaction Value above threshold limit (Rs.50000)||Rs.1000|
|XYZ Ltd.||Rs.500 crores||Rs.8 lacs||Transaction Value above threshold limit (Rs.10000)||Rs.8000|
|PQR LLP||Rs.40 crores||Rs.2 crores||Rs.
2 lacs|
Difficulty in Withholding tax:
It will be difficult to withhold the tax when the buyer and seller do not know each other.For instance, where a transaction is done via Coin DCX, the buyer and the seller enter into a crypto currency transaction without knowing the counterparty.In that case, tax can be withheld by the Coin DCX itself and remit the balance amount to the seller.However there is no further clarity provided by the government.
Similarly, in case of peer to peer transactions executed via Binance, where buyer and seller know each other, the onus to withhold tax will be on the buyer subject to limits specified in the above table.
GIFT of VDA:
The phase property as defined in explanation to section 56(2)(vii) has been amended to include VDA, pursuant to which any receipt of VDA without consideration or for inadequate consideration by the resident individual would be taxable in the hands of the recipient as per Section 56(2)(x).
This welcoming amendment is summarized below
|Tax on VDA||30% (excluding surcharge & cess)|
|Deductions||Cost of acquisition only (no incidental expenses allowed)|
|Set off of losses||Allowed against income from VDA only|
|Carry forward of losses||Not allowed|
|Unexhausted Basic Exemption Limit benefit (Rebate u/s 87A)||No allowed|
|TDS||1%|
|TAN||Not required|
|Gift||1.Received as gift without consideration and the FMV of such VDA exceeds 50,000 then taxable to recipient.|
2.Received for inadequate consideration and the difference between FMV and cost exceeds 50,0000, then difference is taxable in the hands of recipient.
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