By Sunil Badala & Rinkesh Devnani
Budget FY23 proposed to levy a tax on gains from Virtual Digital Assets (VDA) at a flat rate of 30%. Considering the VDA frenzy and the magnitude and frequency of VDA transactions, the government felt it was imperative to provide for a specific taxation scheme to allay any apprehensions about the manner of taxability of income from such transactions. The flat rate of 30% is equivalent to the rate applicable to winnings from lotteries, games, etc. Owing to applicability of the highest slab rate, possibly many investors will steer away from VDA; perhaps that is the intention of the government, considering the risks involved, money laundering issues, and absence of adequate regulations.
The Bill defines VDA in a very broad manner to include inter alia any virtual currency (other than those that are recognised under foreign exchange regulations), a non-fungible token or any other digital asset as may be notified by the government. Considering this, the central bank digital currency (CBDC) proposed to be issued by the governments should be outside the purview of VDA.
The Bill proposes computation of gains by reducing only the cost of acquisition of VDA. No deduction for any other expenses/losses is permitted. The losses from VDA are neither allowed to be set off against any other income nor are they allowed to be carried forward. Additionally, any gift of VDA is taxable in the hands of the recipient at fair market value.
The intention behind specification of the aforesaid taxation mechanics appears to be about ensuring symmetry and common standard for taxability of gains from VDA, and to some extent, discouraging speculation in VDA. Having said this, computation mechanisms specified may fall short in many situations. Clarity needs to be provided in relation to the following situations to reduce potential litigation:
- It should be clarified that the loss from one VDA is adjustable against gains from another.
- There is no definition of the term ‘cost of acquisition’. While this term is defined in the context of capital gains, it is not clear under which head the gains from VDA are taxable.
- No mechanics to determine the fair market value has been specified where there is a gift of VDA. Further, there is no clarity as to what the cost of acquisition of VDA will be in the hands of the receiver of such a gift when she eventually sells the VDA. Again, in the context of capital gains, it is provided that the fair value on which the receiver has already paid the tax at the time of receipt of gift shall be deemed to be the cost of acquisition at the time of disposal of such asset.
As mentioned earlier, it is not clear under which head the gains from VDA are taxable and, consequently, this may lead to double taxation.
- There is a need to clarify how the cost of acquisition is to be determined where the VDAs are acquired through mining.
- What is the situs (the place to which, for purposes of legal jurisdiction or taxation, a property belongs) of a VDA? This is relevant in the case of non-residents acquiring VDA in India. Similarly, when residents mine VDA outside and dispose it off outside India, clarity on situs will help determine the taxing rights of the offshore jurisdictions (subject to taxation laws of such offshore jurisdictions).
- As the provisions are applicable with effect from April 1, 2022, questions are already being asked as to how to determine the gains earned in the past and the rate at which such gains are taxable.
- The proposed law also provides for deduction of tax by the buyer from payment to the seller. Therefore, in case of exchange of VDAs (for e.g., where NFTs are acquired using Bitcoin), both parties to the transaction will have to deduct tax. Additionally, most of the VDA transactions in India happen through crypto exchanges where the buyers and sellers do not know each other. In such a situation, it is difficult for the buyers to comply with this requirement. Potentially, this obligation may fall upon the exchanges facilitating the trade.
All of this is merely an illustrative list of issues that may arise, considering the provisions proposed for taxing gains from VDA. The position also needs to be clarified from an indirect tax point of view as, recently, the GST authorities probed various crypto exchanges for defaults from indirect tax point of view.
In the interest of all the stakeholders the Government should clarify the ambiguous points both from a direct and indirect tax perspective to avoid potential litigation. This certainly will provide an impetus to the innovative spirit of this nascent industry and its possible beneficial use cases for the society at large.
Respectively, partner and head, financial services, tax, KPMG in India, and chartered accountantViews are personal