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Business News/ Money / Personal Finance/  India’s framework for crypto tax still needs work

India’s framework for crypto tax still needs work

NFTs specifically notified by the government will be covered by VDAs

Photo: iStockPremium
Photo: iStock

The 30% tax on cryptocurrency income has evoked mixed reactions from Indians. Some opine that the rate of 30% on cryptocurrency implies that the government puts it at par with betting and speculation. A petition to scrap the 30% received the initial target of 50,000 signatures within hours of starting the petition. Some are relieved that at least a framework to tax cryptocurrency has been put in place. But to most, a 30% tax was the easier choice between two evils — the other being an outright ban. Dealing in cryptocurrency is legal in India so long as regulation does not make it illegal. Tax law, by nature, cannot legitimise transactions or commodities. Even without regulatory clarity, tax laws apply. The understanding that India has proposed a tax on cryptocurrency and hence legitimized it, is therefore, flawed.

Section 2(47A) of the Finance Bill seeks to define ‘virtual digital asset’ (VDA) as any information, code, number or token generated through cryptographic means or otherwise. The definition is broad enough to cover cryptocurrencies as we know them today and accounts for future developments in the crypto ecosystem.

Transactions in money are not liable to I-T and logically, Indian and foreign currencies have been excluded from VDAs. There is an almost unanimous voice to never accord cryptocurrency a currency status including from the RBI. El Salvador’s adoption of Bitcoin as legal tender created some confusion over whether the definition of VDA will fail to cover Bitcoins and also consequently fail to tax transfers of the same. Mostly because foreign currency under the FEMA means any ‘currency’ other than Indian currency. Bitcoin is the most popular currency in India. Therefore, not taxing transfer of Bitcoins makes the entire crypto taxation framework fruitless and is definitely not legislative intent. Even if Bitcoin is legal tender in other countries, any instrument must be a currency first and then only can it be foreign currency.

Only NFTs specifically notified by the government will be covered by VDAs.

The first approach seems quite tedious because every NFT will have to be notified first and can only then can it be taxed. The second approach of characterization seems probable. As interesting as it may be to see what characteristics will be laid out for NFTs in the notification, time is of the essence. Until a notification spelling out these characteristics are not laid out, they cannot be taxed at 30%.

Unintended victims of the definition are debit card or credit card holders who earn reward points which are generated through electronic means. Generally, not taxable, but by virtue of the broad definition of VDAs, experts think that they may be taxed.

The classification neutral approach to taxing VDAs has been adopted. As per proposed section 115BBH, w.e.f. April 2022,

· any income from the transfer of any VDA shall be taxed at 30%

· no deductions other than cost of acquisition shall be available

· no carry forward or set-off of loss of or against the income from transfer from VDA

But will ‘transfer’ include coin rewards for mining and staking? On Ethereum or Bitcoin, when a user writes and signs a transaction, miners validate the transaction by solving complex computational puzzles. A mining reward, sometimes in the form of coins is paid to these miners. The coins are not paid by an entity but are won on the network. Therefore, there is no transfer or transferor per se. It does seem like only secondary transfers of tokens are taxable and not mining/ staking.

Bitcoin was started as a political project and only became a financial project much later. There is still a section of Bitcoin enthusiasts who staunchly believe that Bitcoin or blockchain on the whole shouldn’t be regulated or taxed. However, that’s a very distant dream and what can be controlled is how fairly it can be regulated or taxed. To have a more robust taxation framework for cryptocurrencies, the government must:

1. Clarify that cryptocurrencies whether recognised as legal tender in other jurisdictions or not will be covered by the definition of VDAs

2. Clarify whether mining rewards in the form of coins are taxable under section 115BBH

3. Notify preferably, the characteristics of NFTs that will be covered under the definition of VDAs

4. Introduce the framework for taxing cryptocurrencies under goods and services tax law to offer tax certainty.

Yeesha Shriyan is research fellow in tax law at Vidhi Centre for Legal Policy.

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Published: 08 Feb 2022, 10:23 PM IST
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