Tax Dept clears air on definition of NFT under virtual digital assets

Income Tax Department has said that virtual digital asset (VDA) as non-fungible will not include an NFT whose transfer results in transfer of ownership of underlying tangible asset. Also it has said that subscription to websites or platforms or application will not be treated as VDA besides gift card or vouchers, mileage points, reward points or loyalty cards will not be categorised as VDA.

The Central Board of Direct Taxes (CBDT) has issued two notifications bring lot of clarity on VDA, which are popularly known as crypto. These notifications are follow up to Budget announcement which prescribed 30 per cent tax on income from the transfer of VDA and 1 per cent TDS (Tax Deducted at Source) on transaction of VDA. While tax on income came into effect from April 1, TDS has come into effect from July 1.

One of the notifications specifies “a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a non-fungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.“

Sandeep Jhunjhjnwala, Partner with Nangia Andersen LLP, said there were concerns on what would be covered under as NFTs, as its taxation under normal provisions could be more beneficial vis-à-vis deemed higher rate of taxation under VDA provisions. “The notification is a welcome move by the government to exclude NFTs which derive value from underlying tangible asset and transaction involves the transfer of the underlying tangible asset. Hence, not all NFTs would be subject to VDA tax provisions,” he said.

In another notification, CBDT said that VDAs will exclude gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services. Mileage points, reward points or loyalty card and subscription to websites or platforms or application will not be treated as VDA.

According to Aakansha Goel, Partner with T R Chadha & Co LLP, most of the above VDAs have been covered within the ambit of Section 194R of the Income Tax Act, which seems to be the reason for exclusion of the same from the purview of VDA.

Raghav Bajaj, Counsel with Khaitan & Co, said it clears the ambiguity that had arisen in relation to the scope of VDAs.

Amit Maheshwari, Tax Partner, AKM Global, said this is a welcome clarification by the government since the definition of VDA is worded in an all encompassing manner under the law.

“The unintended consequence of the same covered the online gaming coupons, codes, website subscriptions, gift coupons, CRED coins, credit card reward points, and mileage points under VDA category. With this clarification now, the ambiguity has been addressed. They do not have to bear the tax burden of 30 per cent, which will create certainty in this space,” he said.

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