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TMI BlogDevelopment in the taxation of income arising from the transfer of virtual digital assets (VDAs) : Clause 194 (Table: S. No. 4) of Income Tax Bill, 2025 Vs. Section 115BBH of Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... f digital assets, cryptocurrencies, and blockchain-based tokens. This provision is to be examined in the context of the existing Section 115BBH of the Income Tax Act, 1961, which was inserted by the Finance Act, 2022 and operational from 1st April 2023, thereby marking the first legislative attempt to tax VDAs in India. The commentary will first provide a detailed analysis of Clause 194 (Table: S. No. 4), followed by an in-depth comparative analysis with Section 115BBH, highlighting similarities, differences, legislative intent, and practical implications. Objective and Purpose The legislative intent behind Clause 194 (Table: S. No. 4) is to create a clear, unambiguous, and robust tax framework for income arising from the transfer of virt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed against income computed under any provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding tax years. 2. Key Provisions * Applicability: The clause applies to "any person" earning income from the transfer of any virtual digital asset, thereby encompassing individuals, companies, firms, and other entities. * Flat Tax Rate: The income from the transfer of VDAs is taxed at a flat rate of 30%. This is irrespective of the total income or the slab rate applicable to the assessee. * Computation Mechanism: The tax payable is the aggregate of: * Tax on VDA income at 30%. * Tax on the rest of the income at applicable rates, as if VDA income was excluded. * Denial of Deductions and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Startups: Entities dealing in VDAs, such as exchanges, trading platforms, or companies accepting VDAs as payment, must account for the flat 30% tax on gains, with no deduction for operational expenses. * Miners and Developers: The cost of acquisition may be interpreted to include the cost of mining or acquisition, but other related expenses are disallowed, potentially increasing the effective tax burden. 2. Compliance Requirements * Taxpayers must segregate VDA income from other income for tax computation. * Losses from VDA transfers are ring-fenced and cannot be used to offset other income or carried forward, requiring careful record-keeping and reporting. * Assessment and audit procedures must account for the special regime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of "Transfer": * Section 115BBH: Refers to "transfer" as defined in section 2(47) of the 1961 Act, which covers sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion of asset, etc. * Clause 194: Refers to "transfer" as defined in section 2(109) of the Bill. The content of section 2(109) is not provided, but it is likely analogous to section 2(47) of the 1961 Act. The explicit inclusion of "whether capital asset or not" in both provisions ensures that even VDAs held as stock-in-trade are covered. * Denial of Deductions: * Both provisions categorically disallow any deduction for expenditure or allowance other than the cost of acquisition, thereby preventing the reduction of taxable VDA income thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. * Valuation and Reporting: The determination of fair market value, especially in the absence of a regulated exchange or in the case of peer-to-peer transfers, poses practical challenges. * Overlap with Other Provisions: The exclusion of VDAs from the general capital gains regime may create conflicts or confusion in cases where VDAs are used as consideration for goods or services. Practical Implications: Stakeholder Analysis 1. For Taxpayers * Increased Tax Burden: The flat 30% rate is higher than the long-term capital gains rate for listed securities and may discourage investment or trading in VDAs. * No Relief for Losses: The inability to set off or carry forward losses may adversely affect active traders and investors, especi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Critique The policy rationale is to: * Prevent tax evasion and avoidance in a sector prone to volatility and speculation. * Ensure administrative simplicity by denying deductions and set-offs. * Maximize revenue from a new and growing asset class. However, the regime may be critiqued for: * Being overly harsh on genuine investors and traders by denying loss relief. * Potentially discouraging innovation and growth in the digital asset sector. * Risking non-compliance or migration of activity to unregulated or foreign platforms. Conclusion Clause 194 (Table: S. No. 4), Income Tax Bill, 2025, closely mirrors the existing Section 115BBH of the Income Tax Act, 1961, in its approach to the taxation of virtual digital assets. Bot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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