Gifted Virtual Digital Asset to be taxed at market value at the recipient end: CBDT Chairman JB Mohapatra

The section, which will be triggered in the case of virtual digital asset, will be 194S. It casts the responsibility on the purchaser at the time of payment. So, if the purchaser is an Indian, understandably, if he pays, then he makes that deduction at the rate of 1 per cent deposit with the government. So, at the time of payment, that one per cent is deducted. Now, at the time of sale, they don’t have any obligation, but they have to report the surplus to which they have made. A purchase is made here. and sale made over here and both the counter parties are stationed here, it’s very easy to correlate. In case of sale being made to somebody abroad, there will be an issue. We will tackle that as and when the issues emerge. The party who is resident in India, if he’s sourcing his purchases from India, it’s fine. If he is sourcing his purchases from outside, that is fine also if rules are followed. When he sells, whether in India or to a wallet, which is stationed outside India, he will be exposed to tax. There is no problem with that.

So, at the time of the acquisition, we will have a fair idea who is acquiring what with effect from a particular date. At the time of sale, it will be self-reporting by somebody and there will be signs of this sale in either in his wallet or in his bank account. We track it from there. The TDS architecture reflects the number of investors, the range of investment in each class of case and what exchanges are particularly doing in organizing that business. Exchanges, here, also typically know they could also do trading all by themselves. So, they stand as a counterparty to any transaction also.

We enforce TDS provisions, through delayed or non-deduction of TDS. Also, penalty could be levied in some cases and we can go to the extreme in case somebody is flouting it. What I’m trying to say that the TDS provisions are our gateway to understanding the contours and the profile of an investor and what he’s doing with his money and where the money is tented or it’s clean. This will give us an idea.

Unfortunately no because we have also made an amendment in Section 56(2). So, we have inserted one word that in case of gift to the virtual assets, with inadequate consideration or without consideration, it will be taxed in the hands of the recipient at the full value. The legislative stance is now that we will not wait for you to sell off then new declare. The market value at the time of gifting will be taxed in the hands of the recipient.

The courts have interpreted section 14 A in this manner that if I don’t have exempt income, the disallowance cannot be made, and particularly 14 A meaning thereby, I should have an exempt income in order to disallow the related expense, which is not the legislative intent to have this kind of interpretation. Now what we are saying whether or not exempted income arose, accrued or you receive the exempt income in that year, if you have any expenses related to the exempted income, 14 A will be triggered. Suppose you have a mixed business where you do some agricultural operations also and you also have manufacturing concern which is having income which is taxable. In your accounts, you say that agricultural expense is like Rs 5 crore and receipt from manufacturing receipt is Rs 20 crore. But I don’t have any agri income because the harvest has not yet happened, I have not sold yet. But you have to allow me this expense, because I have not made any income. Courts have interpreted that if you have not any exempt income, you cannot make the disallowance. This is a very paradoxical situation before us. So, what we have done is clarify 14 A in such a manner that whether or not you are receiving the income in your hands, or whether or not it is accrued or arising, it’s immaterial. Section 14A will be triggered to the extent this expense is geared towards earning of exempted income.

The simple purpose of saying that cess not to be allowed is that from the beginning (Assessment Year 2005-06) that the cess is anything other than a tax. You determine tax, then you determine surcharge on the tax and then you add 4 per cent cess to the tax & surcharge. It is part of tax bracket. On this issue, many courts have held in the favor of the department, some courts have held against us. Now what we are clarifying that cess has never been intended, to be meaning anything other than part of tax. And it should be understood that this view of the department has been there since Assessment Year 2005-06, the year in which it was introduced