Finance Minister Nirmala Sitharaman while presenting Budget 2022 announced that virtual digital assets will be taxed and any income from transfer of such asset shall be taxed at 30 percent.
"One of the demands of IndiaTech.org was to come out with the term for the virtual digital asset class and that there should be clarity on taxability. Non-fungible tokens (NFTs) have been also defined in the Budget," said Rameesh Kailasam, CEO, IndiaTech.org.
While some in the NFT industry are welcoming clarity on taxability, others raised concerns on the hefty tax rate.
"We expected the Capital Gain tax to be around 10 -12 percent, but 30 percent is way too much for a digital classified asset," said Micky Irons, Chief Marketing Officer, DeSpace Protocol.
Adding to this, Dhruv Saxena The Chief Strategy Officer of Vistas Media Capital, said, "Capital gains would expectedly attract tax, however twice the regular rate is a curious outcome. It's certainly a dissuasive decision since a few traders/investors do make outsized gains but it does still allow for the sector to function."
Kailasam said that IndiaTech.org had recommended capital gains taxation for those holding such assets and profits and gains from business for those holding it as stock in trade. "Typically a 20 percent would have been on par with other capital gains format. What a large taxation does is it makes people look at greener pastures elsewhere. A 30 percent tax may be on the higher and can disincentivize some people to trade in virtual digital assets including NFTs," he added.
Pritha Jha, Partner, Pioneer Legal, said that taxation on income from sale of virtual assets will result in a slow down of a sector that was growing rather rapidly. "Those who trade in crypto and NFTs will be worried," she added.
Adding to this, Rishi Anand, Partner, DSK Legal, said, "Flat 30 percent tax rate may not be the best outcome that is without considering aspects of long and short term gains basis the time period of holding of such assets."
Keyur Patel, Co-Founder and Chairman of GuardianLink and BeyondLife.Club explained that while 30% is slightly steep, in NFT specifically the gains are exponential.
"When you have a buyer who is gaining 300 to 600 percent in profits, taxing 30 percent is affordable. Also, NFT cycle time from buy to sale is short, less than 90 days, and one can afford slightly steep taxation for such gains. There will be no direct impact on NFT sales, we see no slowing down of the momentum. Eventually, we believe world wide tax implications will be unilateral around 18 to 20 percent," he added.
Patel further explained that an NFT purchased for Rs 100, when sold for Rs 1,000, the 30 percent is effective on Rs 900 which is the net effective gain for the seller.
Along with 30 percent tax, there will be 1 percent TDS (tax deducted at source) on payments made on transfer of digital assets, the FM had announced.
Elucidating on this, Amer Ahmad, Head of technology at Blink Digital said, "It'll be a flat fee on transfers and something that platforms such as crypto exchanges will have to implement. Exchanges will have to set up the infrastructure to deduct and report TDS. This effectively allows for the government to track traded amounts while passing on the headache of implementation to the platforms."
Adding to this, Sameer Jain, Managing Partner, PSL Advocates & Solicitors said that TDS of 1 percent has been introduced to collect data on people’s trading.
GuardianLink and BeyondLife.Club's Patel also pointed out that virtual assets as lumped into one by government implies crypto and NFTs all under same bucket. "This implies huge friction initially until the user base understands that all asset classed must be taxed for the holistic economic growth. Initially in the space it will create major roadblock for the investor community but like all eco systems, this too shall evolve."
He added that NFTs are nascent in its classes and with such taxation will have to eventually adjust to grow the developing ecosystem. "Worldwide NFTs are still classified as non taxable assets, and it is imperative that the adjustment in understanding that crypto token is different than digital NFT token is taken into consideration for future amendments and allow industries like gaming, interactive immersive museums and other edutainment NFT frameworks succeed without tax burden."
While taxation is a concern, Kyle Fernandes, CEO & Co-Founder of MemeChat that recently launched meme NFTs sees this as strong endorsement by the government for virtual digital assets.
"It's a widely acknowledged fact that the crypto/NFT industry has also led to a boom in job opportunities and the government is now recognising the same," said Vishakha Singh's (VP, WazirX NFT marketplace).
Shaamil, Founder, Diginoor.io believes that the taxation of virtual digital assets should convert into confidence for many Indians to start looking at NFTs as another asset class option.
"It will bring in confidence and operational clarity for all stakeholders, including companies, buyers, and even investors," added MemeChat's Fernandes.
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