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Thursday, December 1, 2022

An analysis of crypto tax in the union budget of India, 2022

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Across the two months gone by, crypto regulation in India has become a trending topic. The beginning of the phase was marked by rumors that the government is soon going to launch a bill for regulating private crypto assets. Similarly, it was being stipulated that the Finance Minister will release a policy for taxing crypto assets in the union budget.

The proposals that the Finance Minister had actually put forth were characterized by the following points. 

There will be a 30% tax on the profits that are generated by the sale of crypto assets. 1% TDS will also be levied over any transaction that involves the sale of a crypto asset. In this article, we will discuss in further detail the budget for 2022 and the crypto aspect of it.

The legislation that will deliver the legal effect to the aforementioned proposals is the Finance Bill, 2022. In Finance Bill, 2022, the terms crypto assets or cryptocurrency are not mentioned. Instead, the term used for referring to the aforementioned is ‘virtual digital asset’, defined in the following way.

  1. Any token, number, code, or information that is neither the Indian currency nor a foreign currency. A virtual digital asset should have been generated cryptographically or otherwise. It may have any name and should provide a digital representation for the value exchanged with consideration or without the same. A virtual digital asset should have a promise or representation of having an inherent value. Alternately, a virtual digital currency should function as a unit of accounting or a store of value for its usability in any investment or transaction, but not limited to an investment scheme. It should be able to be traded, stored, or transferred electronically.
  2.  a non-fungible token or any other token of similar nature, called by whatever name;
  3. any other digital asset that the Central Government may specify by notification in the Official Gazette:

This stands true when provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of a virtual digital asset subject to such conditions as may be specified therein.

Upon the analysis of the definition, we see that the government has used a very wide definition. This is to cover as many different types of crypto assets as possible.

The government’s stand has been consistent

It is noteworthy that in the Indian tax regime, crypto assets have been defined for the first time. But the stance that the government had taken up recently has not changed, and the same has been reflected in the crypto bill. 

In response to parliamentary questions on November 30 and March 23 last year, the Finance Minister has stressed repeatedly the liability to pay taxes for any profits made via crypto trading under the Indian tax law. But, clarity was called for on matters such as whether crypto profits are to be taxed as capital gains, income from other assets, or as regular income. The answer to the above question would determine the rate of tax to be levied over crypto transactions.

For these uncertainties, Section 115BBH to the Income Tax Act, 1961, which has been proposed in this budget, brings the much called for clarity. It specifies that the incomes/profit generated from the transfer of virtual digital assets would be taxed at the rate of 30%.

The provision further specifies that any expenses that are incurred for conducting crypto trading may not be deducted from the profits generated or set off. This will be the case, except for the amount spent for buying the crypto asset in the first place. Moreover, in case the trading of crypto assets results in losses, then the losses will not be carried over to the following financial years.

Tax deducted at source

Let us consider another one of the important provisions that have been inducted into the budget. There is a requirement to deduct 1% of the transaction value as a Tax Deducted at Source (TDS). This will be deducted by the person who buys and crypto asset.

This is a provision that is going to dent the trading volumes at crypto exchanges severely. 1% TDS would be called for on all crypto trades taking place at the platform. This will be the case when the aggregate value of crypto-assets bought by a person is greater than the limits specified (which are Rs. 50,000 and Rs. 10,000 in the financial year, depending upon the income of the assessee).

Compliance with this provision also requires the buyer to know the PAN details of the transacting party. This, nevertheless, is information that is not generally released to the counterparties. 

It is noteworthy that nearly a fifth of investors over crypto exchanges in India are in the 18-20-year-old bracket. A major section among them is students who do not file income tax returns. 

In the light of these complications, the industry body that represents crypto exchanges in India has also decided to reach out to policymakers, and brief them of the implementation issues stemming from these provisions.

It seems that for ensuring that indulgence in crypto-to-crypto trading instead of using fiat currency does not circumvent the provision for TDS, the provision has also been made applicable to transactions where crypto-assets are bought or sold for consideration other than cash or currency. But the drafting of the provision is broad. It will lead to a situation where a seller who accepts payments for goods or services in cryptocurrency would also become liable to withhold and pay the 1% TDS on behalf of the buyer. As per the provision, cryptocurrency is an item being sold, and not a payment for another item. The goods or services being sold by receiving payment in cryptocurrency would then be deemed to be the consideration and the seller may have to withhold and deposit 1% TDS.

 Conclusion

The proposal for taxing crypto budgets, as presented in Budget 2022 is a much called for step by the government as it renders clarity to the tax treatment of portfolios dealing in crypto trading. Nevertheless, when we consider factors such as the high volumes currently experienced by crypto platforms and the age demographics involved, implementing the provisions could be a challenging task for the government. The government will also want to ensure that they do not restrict the growing industry. 

#cryptocurrency #wazirxwarriors #cryptobudget

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