Important Indian Tax Proposals Relating to Virtual Digital Assets

The Finance Bill 2022, (the Bill) which is a part of the Budget, sets out proposals to introduce provisions for taxation of virtual digital assets.

Tax on income 

A new scheme to provide for taxation of virtual digital assets has been proposed in the Bill, which states that any income from transfer of any virtual digital asset shall be taxed at the rate of 30%.

It proposes that 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 while computing the income from transfer of such asset.

No set-off or carry-forward of any loss arising from transfer of virtual digital asset shall be allowed.

This amendment will take effect from 1 April 2023 and will accordingly apply in relation to the AY 2023/24 (Financial Year 2022/23) and subsequent assessment years.

Withholding tax on transfer 

The Bill proposes a withholding of tax at 1% on the payment for transfer of virtual digital assets to a resident. Where the transfer is in exchange of another digital asset or partly in cash and partly in kind, the payer shall ensure that the tax has been paid in respect of such consideration.

It also proposes a threshold limit for withholding of tax at source of INR 50,000 in a financial year in the case of specified persons (individuals and HUF in certain cases) and INR 10,000 in any other case.

This amendment will take effect from 1 July 2022.

Gift of Virtual Digital Asset

The Finance Bill 2022 also proposes to bring under the tax net, any gift of a Virtual Digital Asset.

Definition of Virtual Digital Asset

For the above purposes, the definition of Virtual Digital Asset is also proposed to be introduced as: “any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is 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 and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically.”

Taxsutra Note: It may be noted that the above amendments as announced by the Finance Bill, 2022 are still in the proposal stage. They attain finality once the Lower House as well as the Upper House of the Indian Parliament discuss and approve it, post which the Hon’ble President of India gives his assent and the Bill gets converted into Finance Act. In practical experience, it is noted that some proposals do undergo further amendment before being finalized into the Finance Act.