The budget for FY23 announced last week proposes to tax any income from the transfer of any virtual digital asset at a flat 30% rate. The provision will be applicable from April 1, 2022.
The government could fine-tune the provisions proposed in the budget to tax virtual digital assets after discussions with the industry and to account for the dynamic nature of the sector, officials told ET.
“We want to ensure that the definition is dynamic enough to cover any new product that comes by due to technological changes…This sector is witnessing new products in a short time,” a senior government official told ET.
The government would also provide for a specific provision for any removal of difficulty in implementation of the budget provision that may arise, the official.
Multiple concerns
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Experts have pointed out that peer-to-peer (P2P) or wallet-to-wallet transactions may escape this tax.
There are also concerns among some sections of policymakers that the proposed tax regime may provide a window for laundering black money via the provision for tax on gifted crypto assets, people privy to the deliberations said.
They also fear misuse of the route through the use of technology.
Tax officials, however, said while the income tax department would collect tax, other agencies could question the recipient on the source of the gift as information on the gifted crypto assets would be captured in the income tax return.
The tax department has the power to examine whether the donor had acquired the crypto asset from legitimate means and if not, the value of such crypto donated to someone else can also be taxed in the hands of the donor as an undisclosed income or asset, said Rajesh Gandhi, partner, Deloitte India.
However, another industry expert said, this would not apply to gifts given prior to March 31 and the route could be misused.
While a carry forward and set off of past losses against income arising from April 1, 2022 onwards has not been allowed prospectively, but clarity is needed on treatment for brought forward losses, said Sudhir Kapadia, National Tax Leader, EY..
Definition
A new clause (47A) is proposed to be inserted to define “virtual digital asset” under the law.
As per the proposed new clause, a virtual digital asset include any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise.
Non-fungible tokens are also included within the definition. It also provides that the government can notify any other virtual digital asset as a virtual asset.
Tax experts say more clarity is needed as the definition of Virtual Digital Assets under the Income-tax Act, 1961 has a few loose ends.
“Whilst income from transfer and gift of ” virtual digital asset” is referred to in the provisions, it seems income from other types of virtual digital asset transactions such as income of miners, persons minting NFT, fees earned by crypto exchanges, intermediaries like brokers, etc are not specifically included. This aspect needs to be clarified upfront to avoid unnecessary controversies,” said Kapadia.
Kapadia said NFT is treated as a virtual digital asset that may derive value from another underlying asset. For example, the underlying asset could be a painting which is ordinarily a capital asset subject to normal capital gains tax rates. “This also needs clarification,” he said.
Sanjay Sanghvi, partner, Khaitan & Co said the proposed definition of VDA was wide and quite comprehensive to cover cryptocurrencies or any other similar digital assets/ digital currencies which meet the prescribed criteria.
