Taxing digital virtual assets does not endorse their legality, say tax experts

By bringing out a specific scheme for taxing virtual digital assets, the government has merely announced its intent to bring incomes arising from transactions done in the private crypto world under the tax net.

This proposal should be seen as a regulation-neutral exercise and intended to treat any income as income for tax purposes which has no bearing on their legality, say tax experts. 

Regulating private cryptos is a call that is still being considered and decisions are yet to be taken by policymakers on this front even as the budget has set out plans for the launch of digital currency (e-rupee) by the Reserve Bank of India (RBI), said top finance ministry officials on Tuesday.

Tax experts also said that it would not be right to infer that the government has legalised cryptos through the taxation proposal as the Income Tax law is all about taxing of incomes even if they arise from illegal activities. The move to bring the sale of digital assets under taxation does not reflect either any move to legalise them or bring them under any regulatory framework, they added.

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‘Comprehensive definition’

“If you read the definition of the digital virtual asset provided in the latest Finance Bill, it is very clear and covers any information or code or number or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise by whatever name called… this definition also includes non-fungible token or any other token of similar nature, by whatever name called. So the definition is very comprehensive and reflects government’s intent to bring every possible income from virtual digital asset to tax”, G Sekar, Central council member of ICAI told BusinessLine.

He pointed out that the definition of “income” under the income tax law is an “inclusive” one and therefore covers every form of income even if it came from illegal activities such as smuggling.

Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, said that the proposal announced by the government in the budget to allow RBI to introduce the Central bank digital currency as legal tender in a way poses a restriction on the use of any other cryptocurrency as legal tender. With this proposal, the anomaly over use of unregulated digital currencies appears to have been set to rest, he added.

‘A welcome move but...’

He also said that budget proposal on having a specific tax regime for virtual digital assets is a “welcome move but leaves investors with a bitter taste” with a whopping 30 per cent tax on income from the transfer of virtual digital assets.

Amit Jindal, Partner Felix Advisory, PMG – Apiary COE Blockchain, SPTI (Govt of India), said, “Currently, there are more than eight thousand types of digital currencies in trade and all of the transactions are done online with no identification of the source of swapping. The government practically needs a strong mechanism to track all these transfers, provision for ensuring correct reporting, withholding, etc. Controlling and taxing of such transactions would be a big challenge for the government to recover the taxes involved.”

Among the proposed rules for the tax treatment of digital virtual assets are that losses from the sale of such assets cannot be set off against any other income and digital asset gifts will be taxed in the hands of the recipient.

The interesting point is that the specific regime of 30 per cent tax on the sale of digital assets announced on Tuesday will only be prospective and kick in from April 1, 2023 to apply on the assessment year 2023-24 and subsequent years. So incomes earned in the financial year 2022-23 and onwards will be brought to tax under this scheme.

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