Jigar M. Patel
International Tax Attorney
Finance Act, 2022 introduced a specific tax regime for taxation of ‘Virtual Digital Asset’ (VDA), which includes cryptocurrencies, non-fungible tokens (NFTs) and various other digital assets.
Definition of Virtual Digital Asset (VDA)
Section 2(47A) of the Income-tax Act defines what is a virtual digital asset. The definition of VDA is fairly wide and inter-alia, includes any information, code, number or token, not being Indian or foreign currency and generated through cryptographic means or others. VDA includes a non-fungible token or any other token of a similar nature, by whatever name called or any other digital asset as the Central Government may specify.
Taxability of VDA?
Section 115BBH was introduced by the Finance Act, 2022 and contains the provisions regarding the taxability of VDAs. Any income arising to a taxpayer, from transfer of any VDA shall be liable to tax at the flat rate of 30%. No distinction in the tax rate has been provided whether the VDA gain is in the nature of long-term or short-term. Moreover, apart from the cost of acquisition, no other deduction is permissible from the sale value of VDA, while computing the taxable income.
The steep rate of tax and the inability to grant any other deductions from its transfer shows the intention of the Government to dissuade investment in these volatile assets, without an outright ban on the same.
Whether Gift of VDA is permissible?
Section 56(2)(x) deals with the taxability of gifts, which also include VDA as one of the movable assets liable to tax when gifted. A gift of any VDA to a non-relative, if in excess of Rs. 50,000 is considered taxable. However, if the VDAs are given as gifts to ‘relatives’ within the meaning of Section 56 or get devolved through modes like inheritance or succession, the same shall be covered within the exceptions to transfer and not liable to any tax.
TDS under Section 194S
From July 1, 2022, TDS at 1% on VDAs is applicable under Section 194S on transfer of VDA, if the transaction value exceeds Rs. 50,000 during the financial year in the case of a specified person (or Rs. 10,000 in certain other cases).
Restrictions on Loss Set-Off for VDA Transactions
The Income-tax Act explicitly prohibits the set off of losses incurred from the transfers of VDAs against income or gains derived from other VDAs. To illustrate, Sharma sells Bitcoin at a loss of Rs. 40,000 and subsequently sells units of another cryptocurrency, making a profit of Rs. 75,000, he would be taxed on the entire profit of Rs. 75,000 and would not be allowed to set off the Bitcoin loss of Rs. 40,000. Moreover, no carry forward of loss is permissible in respect of VDAs.
Applicability of GST on VDAs?
As per the Goods and Services Act, the VDAs shall be classified as ‘goods’ and therefore, GST shall be applicable on the same. The rate of 18% shall apply in respect of the same.
