Finance Minister Nirmala Sitharaman on Tuesday proposed taxation on transaction of virtual digital assets like Bitcoin and Ethereum, which eventually is a cryptocurrency tax.
While presenting the Budget, Sitharaman has also said Reserve Bank of India (RBI) will launch its own digital currency or digital asset of cryptocurrency.
The announcement has brought closure to long-drawn speculations on how the Government of India will approach the evoloving digital currency space, especially with concerns raised from various sections.
Income from the transfer of any virtual digital assets will be taxed at 30%, Finance Minister Nirmala Sitharaman said in her budget speech. However, losses from sale of digital assets cannot be offset against other income, she added.
Industry estimates suggest there are 15 million to 20 million crypto investors in India, with total crypto holdings of around ₹40,000 crore ($5.37 billion). No official data is available on the size of the Indian crypto market.
The crypto market in India grew 641% in the year through June 2021, according to an October report from Chainalysis, an industry research firm.
Livemint decodes what cryptocurrency taxation means for investors.
What is a virtual digital asset?
According to the Finance Bill, a virtual digital asset is any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme, and can be transferred, stored or traded electronically.
Tax on digital currencies
The 30% tax on cryptocurrencies is irrespective of short term or long term holdings unlike in the equity markets, where there is separate taxation depending on the investment period.
Experts said the tax levied on income arising from the sale of cryptocurrency is similar to the tax rate on winnings from lottery, game shows, puzzles etc.
Investors of cryptocurrency need to pay a tax of 30% on the profits or any income gained from the transfer of digital assets. There will also be a tax on any kind of transfer of cryptos including in the form of gifts and from one wallet to another.
Further, in order to capture the transaction details, the finance minister has also proposed to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1% of such consideration above a monetary threshold.
The gift of virtual digital asset will be taxed in the hands of the recipient.
However, no deduction in respect of any expenditure or allowance of set off any loss will be allowed to the investor while computing income fro transfer of digital assets.
Further, no set off any loss arising from transfer of digital asset will be allowed against any incomed computed and such loss will be carried forward to subsequent assessment years
Commenting on the issue, Zerodha founder Nithin Kamath said, the 30% tax without the option to set-off of losses against other tokens or deductions can lead to a drop in turnover.
"Market markers and active traders are usually 80%+ of turnover in most trading businesses. If costs can't be shown as an expense, losses can compound quickly," he added.
What experts say
"As expected taxation regime on cryptocurrency has been introduced. However the proposed regime appears to be stringent and appears to be in line with speculative income," said Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co.
"Taxation of virtual digital assets - at 30%. No deduction other than cost of acquisition. No set off permitted against other income. Tax withholding to be triggered on sale at 1% beyond certain threshold. Deduction for employer contribution to NPS increased from 10 % to 14% for state govt employees on par with central govt employees. Not extended to non- govt employees," said Saraswathi Kasturirangan, Partner, Deloitte India.
“The move to tax virtual digital assets gives the entire ecosystem including investors and exchanges transparency on the road ahead. 30% tax on income from virtual digital assets, while high, is a positive step as it legitimizes crypto and hints at an optimistic sentiment towards further acceptance of crypto and NFTs across stakeholders in the country. The government has come a long way in its stance towards crypto from last Feb to today and we are confident that this will herald a new era of growth and innovation for India in a Web 3.0 world," said Avinash Shekhar, CEO, ZebPay.
Harry Parikh, Associate Partner - M&A Tax and Regulatory Services, BDO India, said a nonchalant introduction of taxation on digital currency coupled with a withholding tax on every transaction could give rise to a lot of compliance issues for crypto businesses.
The government has declared its intent to go after cryptocurrencies by introducing its own digital rupee and seeking to tax gains on sale of crypto currencies at the rate of 30%. Further to track down crypto gains a TDS of 1% has also been proposed whereby persons engaging in crypto trading will not be allowed to escape the tax net, said Anshuman Khanna, Director at ValPro.
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