virtual digital asset: Unfavourable tax regime may impact growth of virtual digital assets in India

Synopsis

The legal status of transacting in or settling dues through VDAs is unclear. Instead of clarifying its stance, the government has come up with a new tax regime governing taxation of gains from sale of VDAs

virtual digital asset: Unfavourable tax regime may impact growth of virtual digital assets in India  0IANSHINDIThe transactions in virtual digital assets (“VDAs”) have become very popular in India over the past few years. While there are different types of VDAs that are at play, cryptocurrency is one of the most commonly used assets in India. As per a recent estimate India has the highest number of crypto-owners in the world.

The legal status of transacting in or settling dues through VDAs is unclear. Instead of clarifying its stance, the government has come up with a new tax regime governing taxation of gains from sale of VDAs. VDAs have been defined to include cryptocurrency and non-fungible tokens and introducing a flat rate of taxation of 30% on the gains made from the sale of VDAs and requiring the buyer to deduct tax at source at 1%.

The higher rate of 30% appears to have been prescribed with an attempt to disincentivize transactions in VDAs. Regulating transactions in VDAs in line with settled principles of taxation could be a more sustainable way forward which may encourage investments and innovation in crypto industry. However, the critics have criticised this move as a missed opportunity as the current taxation regime does not distinguish between VDAs held as an capital asset and inventory, disregards the period of holding, disallows sellers of VDAs to claim any expenses or brought forward losses, etc. While one could argue that the uniform regime was intended to reduce the ambiguity surrounding the VDAs and provide certainty to taxpayers, such characterisation may inhibit the growth of an industry.

Another concern with the taxation of VDAs revolves around their valuation mechanism. Ascertaining the value of an asset is a key criterion for effective taxation. The present taxation mechanism does not provide any guidelines to ascertain the value of the VDAs. The value of the VDAs also vary across exchange platforms due to availability of stock, differential volumes of trade, etc. As the difference in the cost of acquisition and the sale consideration is the basis on which taxes have to be paid, it is imperative that the government comes up with guidelines for the same. For example, in the US, the fair market value of the virtual currency is valued on the basis of the date and time when the transaction is recorded on the distributed ledger. India can also adopt a similar mechanism.

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View Details »Notably, while a framework to tax VDAs is present under the Income Tax Act, no changes have not been brought under the Central Goods and Service Tax Act (“CGST Act”). As per announcements made by the Hon’ble Finance Minister and certain senior revenue authorities, the Government is in the process of finalising its position regarding legality of VDAs as well as to make them liable to Goods and Service Tax (“GST”).

As VDAs do not qualify as legal tender, they would most likely fall outside the ambit of “money” and could be classified as “goods”, for the purposes of GST. The high rates of taxation under the income tax regime reflect the government’s stance on VDAs, which put them at par with speculative gains or lottery winnings. Thus, the possibility of transactions in VDAs being treated as a supply of goods and the gross value may be taxed at the rate of 28%. This may significantly hamper adoption of VDAs as a means of transaction by the public. Other issues like valuation of VDAs, availing credit of tax paid and inputs, and place of supply, etc. will have to be clarified by the government before VDAs are brought within the ambit of the GST regime.

Recently, the Reserve Bank of India (“RBI”) launched the RBI retail Digital Rupee or the e-Rupee. While it has been clarified that digital rupee will fall out of the scope of the VDAs since it is a recognised currency, it would be interesting to see if the government comes out with a specific preferential treatment to e-Rupee and thereby, providing additional protection to it among other VDAs to encourage the use of digital rupee.

India has emerged as one of the fastest-growing crypto-economies and has already proved to be a potential fin-tech hotspot of the world. However, an unfavourable taxation regime could impair the growth of the VDA industry and rob India of its fair share of economic activities as well as its share of tax revenue. Hence, it is highly anticipated that the government decides to leverage its position as a leader of the global crypto-economy and some up with a comprehensive policy dealing with all VDAs.

SR Patnaik is Partner & Head Taxation; Reema Arya is Consultant; and Mohak Thukral, is Associate at Cyril Amarchand Mangaldas

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)virtual digital asset: Unfavourable tax regime may impact growth of virtual digital assets in India  1virtual digital asset: Unfavourable tax regime may impact growth of virtual digital assets in India  2Saturday, 24 Dec, 2022Experience Your Economic Times Newspaper, The Digital Way!Read Complete Print Edition »

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    Updated: 12/24/2022 — 08:00