Definition of ‘virtual digital asset’

A new clause (47A) is proposed to be introduced in section 2 of the Income Tax Act to define ‘virtual digital asset’ to mean the following:

• 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 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 may be notified by the Central Government;
• It is further proposed that the Central Government may notify the digital assets that shall be excluded from the above definition subject to such conditions as may be prescribed.
• Further, ‘non-fungible token’ is also defined to mean such digital assets, as may be notified by Central Government.

Taxation of income arising on transfer of VDA

A new section 115BBH is proposed to be inserted to provide for taxation of income arising on transfer of VDA. Similarly, gift of VDAis also proposed to be taxable, going forward, in the hands of the recipient or transferee and consequential changes are proposed in the provisions of section 56(2)(x) of the Income Tax Act. Salient features of the proposed taxation regime are as under:

• The income from transfer of VDA will be taxed at a rate of 30% (plus applicable surcharge and cess);
• In computing the taxable income ,only the cost of acquisition of such VDA will be allowed to be reduced from the consideration. No other deduction of any expenditure incurred or allowance of loss shall be allowed to the taxpayer;
• Any loss arising to the transferor of VDA on such transfer shall not be allowed to be set off against other income of the taxpayer and shall not be allowed to be carried off for future set-offs;
• The new provision will be applicable from financial years 2022-23 and onwards

Tax withholding

• A new section 194S is proposed to be inserted which casts an obligation on any person paying to an Indian resident consideration for transfer of VDA, to deduct tax at source (“TDS”)at the rate of 1% (with effect from July 1, 2022). The liability to deduct TDS arises at the time of actual payment or credit to the account of the payee (i.e. accrual), whichever happens earlier.
• It is further provided that in an event the consideration is paid in kind or partly in kind, it is the responsibility of the payer to ensure that requisite tax has been paid before the consideration for transfer of VDA is released to the taxpayer.
• The proposed section also provides for certain exceptions from TDS in cases of ‘specified persons’ and low value transactions.
• Lastly, it is clarified that where a transaction is subject to both TDS under proposed new section 194S and existing section 194-O of the Income Tax Act (which applies to e-commerce operators), TDS will only be deducted under the proposed section 194S.

Conclusion

With the requisite legislative framework in place, the stage is now set to tax the income arising on transfer of VDA, which has long been a subject to intense debate and is likely to bring in significant revenues for the exchequer. There is enough flexibility for government to notify or de-notify VDA from the scope of this new regime, which means that more and more VDA may come within the ambit of the proposed tax.

This article was originally published in The Economic Times on 2 February 2022 Co-written by: Gouri Puri, Partner; Rahul Yadav, Principal Associate. Click here for original article

Read Less-