As the finance ministry is set to define virtual digital assets (VDAs) including non-fungible tokens (NFTs) soon, analysts stressed the need to differentiate between NFTs that digitally represent real or virtual assets from cryptocurrencies that lack any underlying asset. Taxing NFTs at 30% on par with cryptocurrencies could kill the nascent industry, they fear.
VDAs need to be more precisely defined by the Central Board of Direct Taxes (CBDT) for taxpayers to pay first advance tax by June 15.
The definition of VDA under the Income Tax Act, 1961, is very wide and includes any information, code or number generated through cryptographic means or otherwise. The usage of the word ‘otherwise’ extends the scope of the definition beyond ‘cryptography’ and that could possibly include anything. Non fungible token and any other token of similar nature are included in the definition.
“I don’t understand why gains from NFTs to be taxed at 30% on gross basis with disallowance of any other expenditure. Cryptos may lack transparency, but NFTs are not cryptos as one can pay for these through credit cards or other usual payment methods,” said EY India tax leader Sudhir Kapadia. Singapore also tax cryptos, but it has clarified that NFTs are excluded from the definition of cryptos, Kapadia said.
According to analysts, India is home to third most NFT company headquarters in the world. “One has to encourage these technology start-ups instead of killing them right away. If it is a purely NFT start-up, nothing to do with cryptos, why discourage it. Businesses will shift to Singapore and other places,” Kapadia said.
Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen LLP, said: “The flat tax rate of 30% on profits earned on transfer of crypto asset irrespective of the holding period with no deduction and carry forward/ set of off losses can erode significant gains for the budding sector and could stimulate a ‘brain drain’ of the crypto players from India by shifting their presence and setting up outside the country, to other crypto-friendly nations.”
The tax regime also imputes an “exacting TDS” at the rate of 1% for every trade subject to threshold limits, Jhunjhunwala said. “If the intention is just to tax income from cryptocurrencies, then a more precise definition would have been helpful. Even if the intention is to tax income from all kinds of digital assets still setting of precincts is essential to avoid confusion and any consequential litigation,” said Sunil Badala partner and national head, BFSI, Tax KPMG India.
NFTs, in simple words, are digital tokens that operate on a blockchain and can be used to represent ownership of a unique item such as a poem, painting and music, whether digital or physical. Currently, gains from NFTs are taxed as business income or capital gains as per the normal tax provisions.