This post is authored by Mr. Ankit Namdeo (Associate Partner D&Y Law Chambers)
Crypto tax regulation in India has gained attention, with some economies not banning crypto-currencies. India remains uncertain about regulating, legitimizing, or banning them. The Finance Bill 2022 introduced in the Lok Sabha clarified New Delhi’s tax stance.
Proposals under the Bill
The Bill includes ‘virtual digital assets’ (VDA) under the Indian tax net from April 1, 2022, in line with crypto tax regulation in India. Though it doesn’t mention ‘crypto-currencies’ directly, it broadly covers them and non-fungible tokens. VDA is defined as any digital value representation, excluding Indian or foreign currency, transferable, storable, or tradable electronically. The Central Government can also designate other digital assets as VDAs.
Some of the key proposals on the crypto tax
30% tax on the income from the transfer of any VDA;
No deduction or expenditure available other than the amount paid to acquire such VDA while determining taxable income</strong>;
No set-off of losses from VDA available against any income of the taxpayer;
No carry forward of losses in relation to the VDA to subsequent financial years;
1% tax deduction at source applicable on any payment to a resident for the transfer of VDA.
This suggests that income only arises upon the transfer of VDA and not while acquiring or holding it.
Regulatory Approach
The government acknowledges that income from crypto is taxable but does not legalize it. The Finance Minister emphasized referring to it as ‘crypto’ and not ‘crypto-currency.’ The RBI is tasked with deciding whether to ban or regulate crypto. The Finance Bill’s lack of a crypto ban led to a surge in new accounts on Indian crypto exchanges.
The stance of the RBI has been a slow yet cautious approach. Due to the inherent nature of the crypto-currencies being based on acceptance by private parties, the RBI finds itself unconvinced with the idea of regulating and legitimizing VDAs. In a February 14th, 2022 keynote, the RBI Deputy Governor highlighted how crypto-currencies/VDA threaten financial sovereignty and may allow private corporates to manipulate them, leading to control by these currencies or governments. This is likely to wreck the currency system, the monetary authority, the banking system, and the Government’s ability to control the economy. Owing to the above reasons, the Ld. Governor concluded that perhaps banning the crypto-currencies is the most advisable option available to India. Having said this, it is important to note that this is not the last we have heard on this issue and the RBI will need to come out with a much more reasoned approach.</p>
Taxability and Way Forward
The Bill’s proposals clarify the taxability of VDAs and the Indian Government mandates tax on VDA gains, with no relief for losses. Essentially, this income is treated like winnings from lotteries or gaming. Moreover, the proposal to introduce a 1% tax deduction at source on the person making the payment to a resident is onerous, and it will require any non-resident to comply with the provision in case of the purchase of VDA from an Indian resident. Interestingly, the obligation to deduct tax falls on the person making the payment, even when the VDA transfer occurs partly in cash and kind. If the cash component is not enough to discharge the liability to deduct tax, the taxpayer making the payment would need to bear the tax from their own pocket.
The high 30% tax rate might prompt taxpayers to explore transactions between two principals without exchanges. However, since the proposed provisions don’t distinguish between On- and off-exchange transfers via banking channels risk tax penalties.
The crypto tax proposals offer little clarity on regulating or legitimizing crypto-currencies, as tax doesn’t address the legality of transactions. Taxing gains without regulation won’t work long-term. A comprehensive policy, covering both tax and regulation, should address concerns over financial sovereignty and prevent the misuse of crypto in money laundering.
References
Crypto Tax in India Spurs Bonanza for Digital Coin Bourses
Crypto-currencies – An Assessment, Keynote Address Delivered by Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India – February 14th, 2022 – at the Indian Banks Association 17th Annual Banking Technology Conference and Awards, available at RBI