Decoding crypto taxation

Taxing transfer of cryptoassets/cryptos in the hands of all assessees at 30 per cent, as per Section 115BBH, is perhaps the most sensational provision of the Finance Bill, 2022. Unfortunately, the section falls short in defining whether cryptos are capital assets or property in the first place. Section 56(2)(x), which taxes gifting of cryptos between non-relatives, is the only section where crypto is defined as property for the limited purpose of making that section workable.

Section 194S proposes a 1 per cent TDS on consideration payable to a resident on transfer of cryptos. The trigger threshold being consideration in excess of ₹50,000 for payouts from specified individuals/HUFs (those in tax audit net) and payouts in excess of ₹10,000 for others. Section 194S will also apply to non-resident entities in crypto business, if they have a Permanent Establishment (PE)/Business Connection (BC) in India . Whether cryptos are permitted under FDI/FEMA is a separate story altogether.

Non-residents (other than those in crypto business) receiving consideration for transfer of cryptos will be telescoped under Section 195 of the Income Tax Act, perhaps applying for lower TDS deduction certificate as well.

Cryptos do not have any ownership or any identification to any country, or fixation of any territory internationally, and hence are borderless. This being the case, taxing non-residents will be an impossible affair even if the non-residents are based out of India for the simple reason they might claim the cryptos to be belonging to an offshore territory with transfer not having any nexus to India.

The odious topic is akin to taxing indirect transfers of shares of Indian entities (in turn control shifting) between two non-residents. The controversial case of Vodafone, the introduction of retro tax provisions, and the subsequent grandfathering of these to buy peace remain evergreen.

Even if some non-residents have a PE/BC presence (place, agency etc.) in India and are into crypto business, whether the existing provision of significant economic presence criteria is good enough to trap them in the tax net through attribution of income/profits is debatable given that country/origin/ownership fixation is missing for cryptos.

In case of transfer of cryptos between two residents outside India, tax levy may still not be possible; the FEMA provisions are insufficient to net these as offences due to want of clarity on legal aspects of cryptos. Similar is the instance of cryptos transfer between two non-residents but of an Indian cryptos (if at all this gets fixed later on).

The issue of taxing borderless digital transactions gave birth to BEPS (Base Erosion Profit Shifting) Project 1.0. In BEPS 2.0, Pillar–I attempts to allocate profits to tax jurisdictions on rational economic principles, while Pillar–II is about global minimum tax on borderless/ecommerce/tax shoring/treaty shopping entities. Cryptos taxation is not scoped transparently in BEPS.

To recap, most of these developments are of the own making of the developed western world, now direly seeking these to protect/shore up their tax base. India is on a different footing altogether. Whether these provisions are required for us is a separate issue, but having similar provisions might pave way for better orderliness in taxing cryptos as was done a few years ago for ecommerce entities through royalty/fees for technical services provisions/tax equalisation levies. No doubt the topic is still evolving. A consultative white paper seeking views from various stakeholders would have done the trick

Having only a taxing provision of cryptos with no upfront legal fixation is a case of putting the cart before the horse. India may have been be one of the first few countries to tax cryptos but the game appears to be one of misfired shots.

The writer is a chartered accountant

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