What will be the tax component for income from virtual digital assets? How has the crypto ecosystem read this move?
the story So Far: In her budget speech, Finance Minister Nirmala Sitharaman Introduced 30% tax on income earned from transfer of virtual digital assets, The government is yet to recognize cryptocurrency, including bitcoin and ethereum, but this ambiguity hasn’t deterred people from trading in digital assets in large numbers, which apparently forced the government’s hand to declare a tax on such transactions. At a press conference after presenting the budget, Ms Sitharaman said consultations with stakeholders on digital assets are underway, adding that there is no clarity yet on how the Indian government will regulate cryptocurrencies.
What will be the tax component for income from virtual digital assets?
The budget proposes a 30% tax on income from “transfer of any virtual digital asset”. Secondly, no deduction will be allowed, except for the cost of acquisition. Third, loss arising out of such transfer cannot be set off against any income. Fourth, tax at source will be deducted at the rate of 1% to capture the transaction details, thus introducing Tax Deduction at Source (TDS) mechanism.
What has been India’s approach towards cryptocurrencies?
The government and the Reserve Bank of India have in the past cautioned people against treating cryptocurrencies as legal tender. The fact that transactions using such currencies can easily bypass the tax net, and therefore be used for illegal transactions, is troubling governments around the world.
The Reserve Bank of India, in 2018, directed banks not to provide services to the cryptocurrency ecosystem. The Supreme Court struck down the move as disproportionate, observing that such currencies were not banned in the country. A law on cryptocurrencies, which should have been brought in last year, is yet to come to light. Widespread expectation about the government’s approach to this was set in motion by a 2019 report by an inter-ministerial committee that recommended a ban on all cryptocurrencies.
Nevertheless, through all this, cryptocurrency trading in India has grown. In fact, Ms Sitharaman said in her budget speech that “there has been an unprecedented increase in transactions in virtual digital assets. The magnitude and frequency of these transactions has made it imperative to provide for a specific tax regime.”
How has the crypto ecosystem read this move?
All the big players have welcomed it. He has understood this as a move that provides clarity and “mainstreaming” his industry. Nischal Shetty, CEO of cryptocurrency exchange WazirX, tweeted that the government has legalized the industry. He wrote: “This doubles down on the fact that virtual digital assets are legal in India.”
The industry is now set to lobby with the government to reduce the tax on par with other asset classes.
Does this mean that cryptocurrencies are legal?
Post-budget statements by ministers and bureaucrats seem to suggest that the legality of cryptocurrencies in the country is still a gray area, regardless of taxes.
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In an interview with Bloomberg TV, Finance Secretary TV Somanathan said: “They are in a gray area. Buying and selling crypto is not illegal.”
He adds, “We have now put in place a taxation framework that treats crypto assets the same way we treat winnings from horse racing, or bets and other speculative transactions.”
“Yesterday’s budget has given a straight answer – crypto will not be banned,” Union minister Rajiv Chandrashekhar told NDTV a day after the budget.
However, Ms Sitharaman suggested in an interview with Times Now that the question on the ban has not been decided one way or the other. She also seemed to divorce the issue of taxability from the issue of legality.
She said, “There is no way to prevent a sovereign government from levying tax on any activity. Whether or not to impose restrictions will come later when the consultation will give me inputs. But would you say that till then I have done the transaction.” Not even taxing the huge profits going on? I will. Valid or not legal is a different question, levying tax is entirely my prerogative.”
In recent days, experts have pointed out that the legal position is in line with this thought process.
For example, in the decision Commissioner of Income Tax Vs Piara Singh Excerpted from judgment in 1980 Commissioner of Income Tax, Gujarat Vs SC Kothariin which the court observed that “if the business is illegal, neither profit earned nor loss incurred shall be enforceable in law. But, it does not exclude profits from tax law.”
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