Digital assets, require a deeper understanding of the underlying technology because of complexity involved. For instance Crypto Tokens. GoI has been attempting to regulate cryptocurrency, since 2019. The Bill’s introduction before Parliament is in abeyance, indefinitely due to several factors.
Questions around taxability were –
- How to tax the revenue generated by these digital assets?
- Whether capital gains tax should be applied?
- Whether it should be treated similarly to income from speculative businesses?
The popularity of virtual currencies and the unexpected increase in retail investments in these currencies have led to significant volumes and values of transactions in the space. This has drawn the attention of the GoI, which included a new taxation plan in the Union Budget for 2022.
Arguably, tax on this income, is GoI’s way of recognising this income as legal. Taxation measures have to be seen in the context of Digital Rupee, development in blockchain as a technology and the understanding of this technology by the regulators to offer regulations balanced and couched in the existing economy of a country and the rising necessity of digital currency.
VIRTUAL DIGITAL ASSETS
Virtual Digital Assets (VDA) has grown with volume trading. It is a wide segment which is now going to include the E-Rupee proposed to be launched by RBI. The idea is to provide a virtual currency, easily accessible by masses to use and invest with minimal risks.
The increase in digital payment solutions has demonstrated a payment system which can easily replace Cash, RBI has recognised this as an opportunity to offer an RBI-backed digital currency. E-Rupee could be a medium of payment, a legal tender, and a safe store value for all citizen, businesses, governments which can be converted to bank money or cash. The current regulations, indicate that the E-Rupee would be in the VDA category.
Any data, code, number, or token generated by cryptographic techniques or in another way is a VDA, regardless of its name. With the promise or representation that it has inherent value, or that it serves as a store of value or a unit of account, this provides a digital representation of value and is exchanged with or without price. Its usage in any type of financial transaction is likewise covered by this term.
Budget of 2022 has recognised a 30% tax on revenue from VDAs. Proposal for a tax deducted at source (TDS) of 1% on payments or transfers made using VDAs above a particular threshold was also included in the budget.
The new clause 47A of the Finance Bill, defines “Virtual Digital Assets” as – any data, code, number, or token produced by cryptography or another technique.
Despite taxability of VDAs, GoI is discouraging masses against voluminous engagement in such transactions, because of its substantial price volatility, traders of VDA in the crypto space could incur substantial losses.
VDA’s GOING FORWARD
VDA-related data storage and security technology, is still in its infancy. While VDAs are swiftly developing a reputation of a gateway for growth in wealth. In India, it has been estimated that the market value of digital assets is USD 15 Billion. This is an indicator that the India is much invested in VDAs whether it is through Cryptocurrency or accepting the RBI led digital currency.
The usage of digital assets is supported by the recent introduction of clause (47A), under Section 2 of the Income Tax Act, in the Finance Bill 2022. Potential stakeholders and customers are now more inclined to participate in cryptocurrencies and other VDAs like NFT.
The economy of digital assets will alter even more as corporate strategies and consumer behaviour shift in the next years. To capitalise on and mould this transition, there are a few critical actions that can be implemented right now, such as capability and skills building which will automatically impact on the longer run.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Reuters, Inc42