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Business News/ Opinion / Columns/  Evolution of sovereign digital currency in India: The Taxation Angle
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Evolution of sovereign digital currency in India: The Taxation Angle

Digital rupee would be issued in same denominations as paper currency

Photo: iStockPremium
Photo: iStock

The launch of the first pilot for retail digital rupee (e -R) in December created a lot of buzz in financial circles and the fintech industry, especially from the point of view of its future use and application in the retail segment.

However, let us decode and analyse this watershed moment in the evolution of sovereign digital currency in India from the taxation angle.

You must be wondering how a sovereign currency can be taxed. Let me clarify that the holding of and /or transacting in a sovereign currency, in digital form or otherwise, will not give rise to any taxable event, and will not generate any direct income tax or goods and services tax (GST) liability, with ‘currency’ being categorically placed outside the scope and ambit of ‘capital asset’ under section 2(14) and virtual digital asset under section 2(47A) in the Income Tax Act and ‘supply of goods or services’ in the GST Act.

At the same time, the possibility of some unexpected and unassumed but intriguing tax implications cannot be ruled out. Interestingly, this newly launched avatar of digital rupee, more particularly in the retail segment, carries with it all the essential characteristic features of physical currency or cash.

As in the case of the physical currency or cash, the Reserve Bank of India (RBI) will issue the digital rupee. It would be distributed through intermediaries, i.e., banks. It would be in the form of a digital token and will not be an account-based transaction, and so it would be different from the electronic bank balance in current/saving bank accounts. It would be a fungible legal tender for which holders need not have a bank account.

The digital rupee would be issued in the same denominations in which the paper currency and coins are currently issued. Users will be able to transact with e -R through a digital wallet offered by the participating banks and stored on mobile phones/devices. A reasonable degree of anonymity will also be provided for transactions involving the digital rupee. And unlike your saving bank account balance, it will not earn any interest income.

The digital rupee, although nomenclatured as ‘digital’, resembles or is akin to the physical currency or cash. Financial transactions involving the usage of digital rupee fall within the restricted/prohibited category of certain cash transactions under the Income Tax Act.

Currently, any business expenditure payment in excess of 10,000, made in cash, is disallowed in the return of income. Similarly, any premium for medical insurance paid in cash is also not allowed as deduction under Section 80D.

Loans and deposits, exceeding 20,000, taken or repaid in cash are reported in tax audit reports for purposes of levy of penalty. Similarly, any receipt of a sum of 2 lakh or more, in aggregate, from a person in a single day, in respect of transactions relating to one event or occasion, attracts equivalent penalty under the Income tax Act. Further, the benefit of increased threshold turnover limit for presumptive taxation under section 44AD/44ADA, in small businesses and professions, is also not available if the cash receipts in such business or profession exceeds 5% of the total receipts.

And the irony would be that people may not be aware that the use of digital rupee in undertaking such specified restricted financial transactions may actually be treated and considered as cash transactions under the Income Tax Act.

Thus, the usage of the digital rupee in the above specified restricted categories of financial transactions needs to be categorically prescribed by the legislature in the Income Tax Act as an acceptable digital mode of executing such transactions, like the electronic clearing system or UPI (unified payments interface) presently.

Otherwise, it will result in unintended consequences by attracting the above specified penal income tax provisions, applicable in respect of the specified restricted/prohibited cash transactions. As such, the well-intended efforts of the RBI in encouraging the usage of digital rupee may not yield the desired fruitful results and so the digital rupee may eventually turn out to be a costlier proposition from the taxation point of view.

Mayank Mohanka is the founder of TaxAaram India, and a partner at S M Mohanka & Associates

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Published: 21 Feb 2023, 11:28 PM IST
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