VIRTUAL DIGITAL ASSET

[Mr. M. GOVINDARAJAN]

Digital asset

A digital asset is anything that is stored digitally and is uniquely identifiable that organizations can use to realize value. Examples of digital assets include documents, audio, videos, logos, slide presentations, spreadsheets and websites.

Budget speech

The Hon’ble Finance Minister introduced the budget for the year 2022-2023.  In her budget speech she proposed to tax the virtual digital asset.  She informed that there has been a phenomenal increase in transactions in virtual digital assets.  The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.  Accordingly, for the taxation of virtual digital assets, the Finance Minister proposed to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30%. 

• No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income.
• Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1% of such consideration above a monetary threshold.
• Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.

Virtual digital asset

The Finance Bill, 2022 inserted a new section 2(47A) to the Income Tax Act, 1961.   This section defines the expression ‘virtual digital asset’ as-

• any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
• a non-fungible token or any other token of similar nature, by whatever name called;
• any other digital asset, as the Central Government may, by notification in the Official Gazette specify.

The Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

The provisions of sections 203A (Tax deduction and collection account number) and 206AB (Special provision for deduction of tax at source for non filers of income tax return) shall not apply to a specified person.

Non fungible asset

Clause (a) of Explanation to section 2(47A) defines the expression ‘non fungible asset’ as such digital asset as the Central Government may, by notification in the Official Gazette, specify.

Currency

Clause (b) of Explanation to section 2(47A) provides that the expressions ‘currency’, ‘foreign currency’ and ‘Indian currency’ shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (‘FEMA’ for short).

Section 2(h) of FEMA defines the term ‘currency’ as including all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.

Section 2(m) of FEMA defines the expression  ‘foreign currency’ as any currency other than Indian currency.

Section 2(q) of FEMA defines the expression ‘Indian currency’ as currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934.

Taxation of virtual digital assets

The Bill inserted new section 115BBH for the purpose of taxing the virtual digital assets.  This will come into effect from 01.04.2023.  Section 115BBH(1) provides that where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of-

• the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of 30%; and
• the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to above.

Deduction

There will be no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income.

Set off

No set off of loss from transfer of the virtual digital asset computed shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

TDS

The Bill inserted a new section 194S for the purpose of deduction of tax at source on the payment of virtual digital asset. 

Section 194S(1) provides that any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to 1%  of such sum as income-tax thereon.

A transaction in respect of which tax has been deducted shall not be liable to deduction or collection of tax at source under any other provisions of this Chapter.

No tax shall be deducted where-

• the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed ₹ 50000/- during the financial year; or
• the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ₹ 10000/- during the financial year.

The expression ‘specified person’ is defined under Explanation to this section as a person-

• being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed ₹ 1 crore  in case of business or ₹ 50 lakhs  in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
• being an individual or a Hindu undivided family, not having any income under the head ‘Profits and gains of business or profession’.

Notwithstanding anything contained in section 194-O, in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted.

Payment in kind

Some times the payment for virtual digital assets may be-

• wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
• partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer.

In such cases the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.

Suspense account

If any sum as consideration for virtual digital asset is credited to any account, whether called ‘Suspense Account’ or by any other name, in the books of account of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

Removal of difficulty

If any difficulty arises in giving effect to the provisions of this section, the Board may, with the prior approval of the Central Government, issue guidelines for the purposes of removing the difficulty.   Every guideline issued by the Board shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person responsible for paying the consideration on transfer of such virtual digital asset.