Legal Service

Know the Legality of VDA in India

The tremendous growth of digital technology has given birth to Virtual Digital Assets also known as VDA, in the global financial landscape. The popularity of VDA is also on the rise in India. According to the most recent UNCTAD Digital Economy Report, India is ranked 7th worldwide for digital currency adoption. This calls for more regulatory oversight of digital assets.

Virtual assets involve high risk when unregulated, as their value fluctuates and demand drops, making them vulnerable. Establishing a legal framework for digital assets in India was initiated after the Supreme Court’s Judgement 2020 lifted the ban on a cryptocurrency RBI had earlier imposed. India’s regulatory stance has evolved, considering all the associated risks, like money laundering, tax evasion, and financial instability.

What is Virtual Digital Asset (VDA)?

The Central Government on the Union Budget (2022-2023) amended the Income Tax Act,1961, introducing Section 2 (47A) that defines Virtual Digital Asset (VDA). Accordingly, the term means:

• Any information/ code/ number/ token generated through cryptographic means/ otherwise provides a digital representation of value exchanged with or without consideration. It functions as a store of value/ unit, including its use in any financial transaction/ investment or
• Any digital asset notified by the Government or
• A non-fungible token (as notified by the Government)/ any other token of a similar nature.

A Brief Outlook about Taxation of VDA

The Union Budget 2021-22 has sought to impose taxation on Virtual Digital Assets (VDAs):

Section 115BBH: Tax on Gains from Virtual Digital Assets

• 30% Tax: Any profit from selling or trading virtual digital assets will be taxed at 30%.
• Deductions: Only the cost of buying the asset (the amount paid for) from your profit can be deducted, and there is no deduction for any other expenses.
• No Losses: The loss can’t be offset against other income and cannot be carried forward.
• No Exemption: No tax exemption applies to virtual digital assets.

 Section 56(2)(x): Tax on Gifts of Virtual Digital Assets

• Gifts: If a Virtual digital asset of more than ₹50,000 is received as a gift, that value will be taxed as income.
• Frequent Transactions: The income from the frequent buying and selling of virtual digital assets will be treated as business income and taxed at 30%.

Section 194S: Tax Deducted at Source (TDS)

• 1% TDS: A 1% tax is deducted from the payment made to the seller when buying any Virtual Digital Asset.

With income tax return filing services, you can maximize your income tax returns and minimize your tax worries. Additionally, you can streamline your VDA transactions to ensure compliance with ease.

Internet & Mobile Association of India v. Reserve Bank of India

Case Law

The RBI prohibited its regulated entities from facilitating transactions with crypto businesses, highlighting the associated risks and threats. The Internet and Mobile Association of India challenged the RBI notification before the Supreme Court. The Supreme Court acknowledged the legality of VDAs. The SC held that the circular held by the RBI was unenforceable.

• Legal Regulatory Landscape of VDA in India

RBI clarified in May 2021 that the ban on cryptocurrency was no longer valid. This resulted in the establishment of a regulatory framework for VDAs.

• Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

The bill aims to set up a framework for the Reserve Bank of India (RBI) to issue official digital cryptocurrencies and to prohibit private cryptocurrencies (not issued by the government). The legislation is still pending and has not materialized into law.

• Amendment of Schedule III of the Indian Companies Act, 2013

A notification was issued requiring companies to disclose their profits/losses and the number of virtual currencies held in their financial statements from April 4, 2021.

• Union Budget 2022-2023

Taxation of Virtual Digital Assets (VDAs)

• Advertising Guidelines

In 2022, The Advertising Standards Council of India issued ‘Guidelines for advertising Virtual Digital Asset’. Advertisements must include clear disclaimers and accurate information to avoid misleading the public.

Know about the G20 Summit 2023

India took a proactive role in advocating for international cooperation on crypto regulation and proposed a framework for governing VDAs at a global level. This includes suggestions to the International Monetary Fund (IMF) for better regulatory practices.

Other Relevant Laws

• Prevention of Money Laundering Act, 2002
• Foreign Exchange Management Act, 1999
• Income Tax Act, 1961

VDA with FIU-IND

VDA has become an important part of global finance today. The Financial Intelligence Unit – India (FIU-IND) ensures the financial system’s safety and integrity.

Mandatory Registration

Businesses involved in VDA must register with the Financial Intelligence Unit – India (FIU-IND) under the Prevention of Money Laundering Act (PMLA).

Compliance Requirements

• Follow the PMLA and FIU-IND guidelines.
• Submit important documents like financial records, tax returns, and incorporation papers.
• Provide information about the business’s activities and its owners.
• Confirm there are no ongoing legal cases against them.

Registration Process

• Appoint a local Principal Officer (PO) and a Designated Director (DD).
• Enrol on the FIU-IND’s online system (FinGate portal).
• Have meetings with FIU-IND and submit documents.

Stay ahead in the dynamic world of virtual assets and get the registration of the financial intelligence unit in India to ensure compliance and peace of mind to unlock your VDA potential.

Why does India need to Regulate VDAs?

Let’s understand why India needs to regulate VDAs:

· Consumer Protection

When unregulated, Virtual assets involve high risk, as their value fluctuates, and a drop in demand can make them vulnerable. With many people using them, fraud and scams are highly likely.

· Tax Compliance

Proper implementation of VDA regulations will make transactions transparent and streamline the tax collection process.

· Lack of understanding

Many people are not clear about VDAs. Proper regulations keep them informed and protected.

· International transactions

VDAs are used in cross-border deals, which can raise issues like taxes, rates, and legal conflicts. Regulations would overcome these challenges.

· Market Integrity

Trust is very important in the crypto markets. Regulating VDA is a step towards building that trust. These markets are prone to manipulation, price-fixing, and other unethical practices without regulations.

Conclusion

To balance the benefits of innovation with the need to protect its economy and citizens from potential risks associated with VDAs, the legality of VDA is crucial. It fosters the transparent financial environment needed for digital currencies. A well-regulated VDA market can inspire confidence among investors, encourage innovation, and support India’s ambition to be a leader in the digital economy.

Step into the dynamic realm of virtual digital assets with clarity and confidence. Visit our website https://enterslice.com/ to master compliance and tax strategies that empower your financial journey.

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