There has been a lot of confusion around the implementation of taxation rules for virtual digital assets. The exhaustive definition of virtual digital assets led many to believe that several online transactions, which had nothing to do with crypto or blockchains, may also be taxed as VDAs. However, the Government has now settled the issue with a new clarification that excludes certain transactions from the definition of VDA.
Through a notification dated 30th June 2022, the Central Board of Direct Taxes (CBDT) has excluded the following items from the definition of virtual digital assets:
- Gift cards or vouchers for purchase of goods or services. Gifts cards to avail discount on goods and services have also been included.
- Mileage points, reward points or loyalty cards given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program for the purchase of or discount on goods or services have been excluded.
- Subscriptions to websites or platforms or applications have been excluded.
“There were apprehensions that the definition of VDA could include digital gift cards or vouchers, mileage points, reward points, etc which are provided under promotional campaigns as a routine business transaction. This was because a VDA is defined to inter alia mean a code, number or token generated through cryptographic means providing a digital representation of value exchanged with or without consideration,” Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, told FE Online.
“Vide the said notification, the Government has provided a much-awaited exclusion from the definition of VDA in relation to gift cards, vouchers, reward points, etc with specific end-use towards consumption of certain goods or services as well as subscription to websites or platforms,’ he added.
Some NFTs excluded from VDA tax
The 30% tax on income and 1% TDS rules will apply on Non-Fungible Tokens (NFTs). However, the CBDT has clarified that such NFTs would not be considered as VDAs for taxation whose transfer results in the transfer of ownership of underlying tangible assets which is legally enforceable.
“… the Central Government hereby specifies a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a nonfungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable,” the CBDT said in another notification.
According to the above notification, NFTs of tangible assets, like land records, would not be considered virtual digital assets for taxation purposes.
“There were concerns on what would be covered as NFTs, as its taxation under normal provisions could be more beneficial vis-à-vis deemed higher rate of taxation under VDA provisions. The notification is a welcome move by the Government to exclude NFTs which derive value from underlying tangible asset and transaction that involves the transfer of the underlying tangible asset. Hence, not all NFTs would be subject to VDA tax provisions,” said Jhunjhunwala.