What are ‘virtual digital assets’? A detailed Explanation

Soniya Khanna

06 Jul, 2023

The Budget of 2022 has made the Cryptocurrency investors rife because of the imposition of 30% tax on them. However, mostly people are not aware that the proposed 30% tax is imposed on ‘virtual digital assets’ which includes assets other than just cryptocurrencies. This piece of information attempts to shed some light on the scope of ‘virtual digital assets’ and taxes that will be imposed on income gained from such assets.   

What are ‘virtual digital assets’?

In simple words the scope of ‘virtual digital assets include the following:

• Cryptocurrencies
• DeFi (Decentralised Finance)
• Non-fungible tokens (NFTs)

The definition of virtual digital assets excludes Central Bank Digital Currency (CBDC), digital gold and any other tradition digital assets. This definition is mainly aimed at taxing cryptocurrencies.

How are ‘virtual digital assets’ defined according to Finance Bill, 2022?

The Finance Bill, 2022 has defined ‘virtual digital assets’ in the following manner:

• Any code or information or token which is not an Indian currency or Foreign Currency and generated thorough cryptographic means or by any other means, by whatever name called, but providing a digital representation of value exchanged with or without consideration. It involves a promise or representation of having an inherent value. It may function as a store of value or a unit of account including its use in any financial transaction or investment, but it is not limited to investment scheme and can be transferred, stored or traded electronically.
• A Non-Fungible Token (NFT^[1]) or any other similar token by whatever name called.
• Any other Digital Asset which has been specifically notified by the Central Government in the Official Gazette.

Budget Highlights regarding tax on virtual digital assets

Following are the changes brought about on taxing the income gained from Digital Virtual Assets

• Income made from the digital virtual assets shall be taxed flatly at the rate of 30% providing no deductions and no provision to set-off the tax against any other income.
• Transfer of digital virtual assets in the form of gift shall be taxed at the hands of the recipient.
• A proposal has also been made to put in place Tax Deducted at Source (TDS) at the rate of 1 percent so that the government can track the transactions.
• A proposal has been made by the government to introduce Digital Rupee which will be based on the blockchain technology and other such technologies. This currency shall be issued by the RBI in this year itself.

The step of imposing TDS on every transaction has been seen from the market players as a way of tracking the movement of money since there have been concerns about the transactions taking place for unlawful purposes. This also imposes an obligation on the market players to deduct the TDS and report the same to the government.

The market had a long pending demand from the government to provide clarifications about the taxation of the cryptocurrency.

The government is of the view that the usage of digital currency will lead to a more efficient and cheaper currency management system.

Opinions and response from the Industry

Many industry experts have said that by imposing a flat tax on the cryptocurrency at the rate of 30% including with tax on activities such as mining or gifting and no offsetting the loss from other incomes has provided the industry with much awaited clarity regarding the transactions made using virtual digital asset, especially cryptocurrency. However, the industry has cautioned that in the absence of central regulator, it will become difficult for the government to keep a track on such transactions.

Some experts say that the flat tax rate imposed on the virtual digital asset is in line with the taxes imposed on the activities such as winning made from lottery, puzzles, game shows etc.

Leaders from the stock exchanges have thanked the government for the much expected clarity on the taxation aspect of the virtual digital asset and appreciated the intent of the government in protecting the interests of both the consumers and the exchequer.

Other leaders see the move to tax the crypto currencies as a step ahead in legitimising the crypto sector which will pave the way for building a strong crypto ecosystem in India. This will remove the apprehensions of banking sector in extending financial services to the crypto sector.

However, the industry wants some clarity on the following issues:

• What is a taxable event in such transaction?
• What will be threshold for the 1 percent TDS deduction?

The industry hopes that the government will give enough time to the exchanges and other related businesses to integrate their system with the proposed changes such as TDS deduction and Bookkeeping.

Conclusion

 While one half of the industry is thankful to the government in providing clarity and predictable tax regime providing the much required stability to the crypto industry but at the same time imposition of a flat 30% tax rate on the income generated from it and further not allowing the investors to set off the loss against the other income is seen as a discouraging move for the investors making investments in the virtual digital asset. This aspect of high taxation and restrictions on setting off losses is not in line with the expectations from the government.

Read our Article: Digital Identity of Consumers: The Risk and the Role of Banks