Non-resident Indians (NRIs) who have invested in crypto assets are likely to face hassles filing their income tax returns (ITR) this year, due to the ambiguity over certain taxation provisions.
The Finance Act, 2022 had introduced a new flat rate of 30 percent on income arising from transfer of Virtual Digital Assets (VDA) or crypto assets, with effect from assessment year 2023-24.
This means that every transaction of transfer/sale of VDAs on or after April 1, 2022 is covered under this new taxation regime.
The Indian taxation on crypto gains is based on the principle of the residence of the person and the source of income. Worldwide income of Indian residents is taxable in India.
However, NRIs are subject to source-based taxation, meaning only amounts received or accrued from a source, or so deemed to accrue or arising in India, are subject to income-tax in India.
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Let’s look at different scenarios to see how crypto gains are taxed for non-resident Indians.
Buying and selling on foreign crypto exchanges
Experts say that if an NRI buys and sells crypto assets on a foreign exchange, then the said income will not be taxed in India since it does not arise nor is received in India.
“However, the NRI will be liable to tax in his current country based on applicable tax laws,” said Punit Agarwal, Founder of KoinX, a crypto taxation platform.
Experts also note that an NRI is not obligated to report this income in his/her ITR.
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“However, we need to check for the residential status of the NRI for the year under discussion. If the NRI becomes a tax resident for that year, then he/she is liable to pay tax on the global income, and any crypto gains made outside India through a platform or medium become taxable in India,” said Archit Gupta, founder and Chief Executive Officer, Clear.
Buying and selling on Indian exchanges
If an NRI buys and sells crypto from an Indian exchange and the proceeds are withdrawn to an Indian bank account, then the income will be said to arise in India and is liable to be taxed at 30 percent.
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“Filing a return of income will be mandatory in such cases,” said Agarwal.
According to Gupta, the NRI would need to file Form ITR-2 or another form based on what other incomes have been earned by the said individual.
If the residential status of the investor changes
Taxation provisions become a bit confusing if an Indian buys crypto, moves overseas and becomes an NRI.
KoinX's Agarwal believes that currently, the tax department has not issued any guidance on how taxes will work if the residential status of an investor changes.
“However, since VDAs are intangible assets. The location of the taxpayer will determine the country that has a right to tax the income, with due consideration to DTAAs. It has been decided in various court judgments that in the case of intangible assets, the location of the asset is the same as that of the owner. So, if a taxpayer sells his/her VDAs after becoming an NRI, the income may not be taxable in India,” he said.
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However, Clear’s Gupta is of the opinion that if the income is deemed to have been earned in India, then even though the residential status has changed to NRI, the said crypto becomes taxable in India.
“Also, since the trade has been carried out through an exchange, then the transactions will be liable for Tax Deducted at Source, and the NRI becomes obligated to report it in the Indian ITR,” he said.
Further, Naveen Wadhwa, deputy general manager at Taxmann, says that to determine whether the income arising to a non-resident from the transfer of VDAs is taxable in India, one needs to identify the ‘situs’ of the VDA, among other factors.
For legal jurisdiction or taxation purposes, situs means the place to which a property belongs.
“Currently, the Income-tax Act does not contain any explicit provision to identify the situs of VDAs. In the absence of any provision in the Act, the situs of the intangible property can only be decided on the basis of domicile of the owner of such a property. And if the owner of the intangible property is not a resident of India, then income on their transfer outside India cannot be taxed in India,” said Wadhwa.