The government will clarify that losses from the transfer of a virtual digital asset (VDA), including cryptocurrency, won’t allowed to be set off against the gains arising from the transfer of another VDA.

Also, it is set to give a window for companies and other businesses to escape a 50% penalty on the excess tax payable if they had wrongfully claimed health and education cesses as business expenditure in the past. They can voluntarily declare such classification and avoid the penalty.

These amendments are learnt to have been included in the Finance Bill 2022. The amended Bill will likely be tabled in Parliament on Friday.

As the Budget for FY23 proposed to tax any income from the transfer of virtual digital assets at 30%, it also stated the loss from the sale of these assets cannot be set off against any other income. However, some sections of the crypto trade tended to believe that the gains from a crypto transaction could be offset by losses from another such transaction, but not against any other losses.

Minister of state for finance Pankaj Chaudhary told Parliament recently the government will come out with a clear definition of virtual digital assets (VDA) for tax purpose. He added that infrastructure cost incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as deduction by the taxman.

The Finance Bill 2022, as tabled in the House on the Budget day, had proposed a retrospective disallowance of deduction for surcharge or cess under Section 40(a)(ii) with effect from assessment year 2005-06. “The new amendment provides an opportunity to taxpayers to seek non-levy of any penalty by making a claim to the assessing officer requesting for recomputation of total income without allowing surcharge or cess as an expenditure. The form and time-line for making such a claim will be prescribed in due course of time,” said Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP. Health and education cess is levied at the rate of 4% on income taxes.

EY India Tax Leader Sudhir Kapadia said the number of companies who could have claimed the cess and surcharge as busines expenditure won’t be very large.

In the provision that stated that no set-off of loss from transfer of the VDA shall be allowed against income computed under any ‘other’ provision of Income Tax Act to the assessee, the word ‘other’ has been dropped to remove any ambiguity and litigation. “Disallowance of trading loss in VDAs seems to be unnecessarily burdensome. The logic is a bit difficult to understand. This provision may be to dissuade people from entering this business rather than raise revenues for the government,” Kapadia said.

Jhunjhjnwala added that the proposed amendment on taxation of VDS could possibly lead to transactions in VDA being subject to TDS or TCS under provisions other than Section 194S and Section 194-O, thereby leading to double taxation.

Minister of state for finance Pankaj Chaudhary told Parliament recently he government will come out with a definition of VDA for tax purpose. He added that infrastructure cost incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as deduction by the taxman.

The Budget also said a 1% TDS (tax deducted at source) will be applicable on payments made on the transfer of digital assets. This move led to speculations that the government might legalise cryptocurrencies, despite reservations by the central bank. However, finance minister Nirmala Sitharaman subsequently made it clear that the government has the “sovereign right” to tax profits made from virtual digital asset transactions and that the Budget announcement had neither legalised cryptocurrencies nor prohibited them. Any decision to ban or not would be made after wide-scale consultations, she had said.