Scheme of taxation of Virtual Digital Assets

[Poornima Gupta]

Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been introduced in the  Finance Act, 2022 .

This article is divided into following sections-

• Meaning of virtual digital assets (VDA)
• Taxability of income from transfer of VDA – 115BBH
• TDS applicable u/s 194S
• Guidelines issued by Board & Circulars
• Case Laws

Acronyms used-

NFT - Non-fungible token

VDA - Virtual digital assets

CG - Central Government

PGBP - Profits and gains of business or profession

Meaning- Section 2(47A)

The meaning of virtual digital assets is given in Section 2 clause 47A of Income Tax Act. According to it, "virtual digital asset" means-

(a) cryptocurrency (The description given in the Act is complex, so for understanding purpose ‘ cryptocurrency’  word is used.)

(b) NFT / any other token of similar nature

(c) any other digital asset, as the Central Government may specify.

Notification No. 74/2022 - CG excludes certain digital assets from VDA definition

The central government has the power to exclude any digital asset from the definition of virtual digital asset. Using such powers, CG has excluded the following from definition of VDA-  

•  Gift card / vouchers and Mileage points / reward points / loyalty card, used for obtaining goods or services or discounts.
• Subscription to websites/platforms/apps

Notification No. 75/2022 - CG specifies a token which does not qualifies to be a VDA

A VDA shall not include a NFT whose transfer results in transfer of ownership of underlying tangible asset which is legally enforceable .

Taxability of income from transfer of Virtual digital assets- Section 115BBH  (W.e.f AY 2023-24)

Tax Rate on income from the transfer of VDA - @30%

Deductions allowed-

• Only cost of acquisition (No indexation allowed)

Deductions not allowed-

• Any sort of expenditure ( e.g. expenses on transfer )
• Any allowance
• Set off of loss whether arising from transfer of VDA or other source.

Loss from virtual digital assets-

If any loss arises from transfer of VDA, such loss is -

1. Not allowed to be set off from any income (including income from transfer of VDA)
2. Not allowed to be carried forward.

(Usually transfer is always in relation to a capital asset.

However, for the purposes of this section, transfer of any virtual digital asset, whether or not it is a capital asset u/s 2(14), shall be considered as "transfer” u/s 2(47).)

TDS u/s 194S ( W.e.f. 01-07-2022)

Activity	Payment on transfer of VDA
Payer	Any person
Payee	Any resident  (If the recipient of the consideration is a non-resident, the tax  may be deductible under Section 195.)
Rate	@1%
Time	Credit to the account of resident or payment, whichever is earlier
Amount on which TDS   to be deducted	Consideration for transfer of VDA
No deduction of TDS if	Consideration payable by other than specified person & - Value/aggregate value of consideration in the FY is upto Rs. 10,000  Consideration payable by specified person & - Value/aggregate value of consideration in the FY is upto Rs. 50,000

Specified person definition ( for the purpose of Section 194S only)

A specified person means- An individual/HUF not having income under PGBP

or

If an individual/HUF has income under PGBP then he is a specified person if-

• His total sales/turnover from
  • Business  ≤ 1 crore
  • Profession ≤ 50 lacs

during the FY immediately preceding the FY in which VDA is transferred.

(In case of specified person, the provisions of sections 203A and 206AB are not applicable.)

Where consideration for transfer of virtual digital asset is wholly in kind or partly in kind and partly in cash

Where the consideration for transfer of virtual digital asset is –

• Wholly in kind , or
• Partly in cash and partly in kind (where the cash amount is less than the amount of TDS required to be deducted),

in such a case buyer shall release the consideration in kind after seller provides proof of payment of such tax (e.g. challan details etc.)

Some important points-

Where both sections 194-O & 194S apply to a transaction	Deduct TDS u/s 194S
Where both sections 194-Q & 194S apply to a transaction	Deduct TDS u/s 194S

• Apply 1% rate of TDS on “net” consideration i.e. after excluding GST, any other charges and commission.
• When payment is made through payment gateways, the payment gateway shall not deduct TDS if tax has been deducted by the person required to make deduction.

Detailed discussion on TDS on transfer of VDA

Refer to the following manual for explanation on other aspects relating to TDS  on transfer of VDA. Few of such topics being  -

• Due date of Remittance to government account [ Rule 30 ]
• Furnishing Statement of TDS ( Form & Due date ) u/s 200(3) [ Rule 31A ]
• TDS Certificate [ Rule 31 ]
• Consequences for failure to deduct or deposit tax
• Penalty and Prosecution

MANUAL- Section 194S : TDS on payment on transfer of virtual digital asset

 

Power of Board to issue guidelines -

CBDT may, with prior approval of CG issue guidelines for clarification and removing any difficulty in the application of the section 194S . Using such power board has issued several circulars on the subject of VDA mentioned below-

(Circular No. 13/2022 dated 22.6.2022) -

There may be a variety of situations that cause problems and confusion about who is responsible for deducting TDS , such as when VDA is transferred through exchange . Such issues are addressed in this circular.

For a summary of this circular, refer to the manual-

Who is liable to TDS on transfer of a virtual digital assets under section 194-S?

(Circular No. 14/2022 dated 22.6.2022) -

Circular No. 13/2022 dealt with transactions taking place through an exchange. However this circular deals with transactions other than those taking place through an exchange. This is a short circular in comparison to Circular No. 13/2022, so kindly refer to the circular.

(Circular No. 23/2022 dated 3.11.2022) -

Point six in this circular briefly discusses the scheme of taxation of virtual digital assets and touches upon the sections, circulars, and notifications issued in relation to VDA.

It also gives out a few clarifications such as - "Transfer" defined in section 2(47) shall apply to VDA, whether capital asset or not, and that this amendment shall take effect from AY 2023-24.

CASE LAWS -

This topic is relatively new insertion in the income tax act and so there are only a handful of case laws on this topic of VDA.

1. Raunaq Prakash Jain Versus Income Tax Officer, Ward-1, Bhilwara - 2024 (12) TMI 1161 - ITAT JODHPUR

The issue in the present case is -  

Whether cryptocurrency (bitcoin) is a capital asset or not?

FACTS OF THE CASE-

• Assessee purchased Bitcoin (Crypto Currency) in FY 2015-16, and sold it in FY 2020- 21.
• Assessee contended to treat it as 'capital asset’ u/s 2(14) considering it as a property of ANY kind, thereby claiming long-term capital gains, and further exemption u/s 54F.
• Revenue contended that –
  • Bitcoin is not defined as a capital asset u/s 2(14) and so the transfer of capital asset u/s 2(47) of the Act is not applicable.
  • Bitcoin, to be a capital asset, needs to be a property with inherent benefits and value. Cryptocurrency has no independent value or inherent utility.
  • Tax the net gains on the sale of Bitcoins as ‘Income from other sources’ u/s 56.

DECISION-

• Purchase & sale of cryptocurrency (bitcoins) has got the right of the assessee attached to the investment made.

Explanation 1 to section 2(14) reads that –

“property” includes and shall be deemed to have always included any right in or in relation to an Indian company, including right of management or control or any other right whatsoever. 

• Thus, all rights are property, and thereby, the assessee's right in Bitcoin (though a virtual asset) is a capital asset.
• Further section 2(47) of the Act defines transfer in relation to a capital asset to include sale, exchange or relinquishment or extinguishment of any right therein.

Thus , the gain on sale of crypto currency (bitcoin) is chargeable to tax as capital gain. As a result, the deduction under Section 54F is also allowed.

Decision in favour of assessee.