There has been a spike in dealings related to virtual digital assets (VDAs) in recent times. Further, a market is emerging where payment for the transfer of a VDA can be made through another such asset. Hence, tax authorities have introduced a new scheme for the taxability of such transfers:
Taxability of virtual digital assets
VDAs have been defined to include cryptocurrency, non-fungible tokens, etc (excluding currency). The definition is quite wide and has been kept open to cover any other digital asset, as may be notified by the central government.
- - Any income arising from the transfer of VDAs will be taxed at 30 percent (without any slab rate benefit). Surcharge (depending on the income level) and cess will be applicable thereon.
- - No deduction in respect of any expenditure (other than cost of acquisition) or allowance shall be allowed while computing the said income.
- - Set-off of loss from any other head of income shall not be allowed to the taxpayer against the income generated on VDAs.
- - Also, any loss arising from the transfer of VDA will not be allowed to be adjusted with income under any head of income nor can it be carried forward to subsequent assessment years.
The Finance Act 2022 has introduced Section 194S with effect from 1 July 2022, which provides for withholding of TDS at 1 percent on payment for transfer of VDA to a resident.
However, in case the payment for such a transfer is (i) wholly in kind or in exchange of another VDA where there is no part in cash; or
(ii) partly in cash and partly in kind, but the part in cash is not sufficient to meet the TDS liability in respect of the whole of such transfer, the person before making the payment has to ensure that tax has been paid in respect of such consideration.
Further, no tax is to be deducted in case the payer is a specified person and the aggregate value of consideration to a resident does not exceed Rs 50,000 during the financial year. In any other case, the said limit is proposed to be Rs 10,000 during the financial year. A specified person here means an individual or HUF: (a) whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed Rs 1 crore in case of business or Rs 50 lakh in case of profession, during the financial year immediately preceding the financial year in which such VDA is transferred; and (b) not having any income under the head “profits and gains of business or profession”.
The section does not deal with payment to non-residents. Payments to non-residents on account of transfer of VDA would continue to be governed by the provisions of Section 195 (i.e. at the rate of 30 percent plus surcharge and education cess or applicable rates under DTAA).
Gifting of VDAs
Besides the above, gifting of VDA will also be taxed in the hands of the recipient, subject to certain exclusions.
Practical challenges abound
The following challenges could arise when determining taxability of virtual digital assets
- - The origin of an intangible asset like VDA would be required to determine whether it is Indian sourced or foreign sourced. One may have to rely on guidance available from judicial precedents.
- - To analyse the provisions of the DTAA, characterisation of VDA as capital asset or stock-in-trade would also be required.
- - When transaction of buy-sell of VDA is happening through an exchange, it will be practically difficult to comply with the TDS provisions as the buyer will not know who the seller is.
- - Determination of fair market value of the VDAs will require guidance/norms given the same are volatile in nature.
Such amendments will help the government by tapping into the growing market of digital assets and increase the tax revenue base.
Homi Mistry is a partner with Deloitte India. With inputs from Niji Arora (senior manager) and Zalak Shah (deputy manager) with Deloitte Haskins and Sells LLP.
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