We were recently asked for an opinion on the taxation on cryptocurrency under the Finance Bill, 2022. The following are the questions and in very short, the answers.
The Finance Act, 2022 which governs financial proposals for FY 22-23 has introduced taxation of Virtual Digital Assets (VDA) which is defined under section 2(47A) of the Income Tax Act, 1961. A VDA is any information, code, number and token generated cryptographically and providing a promise of having inherent value and digital representation of value with or without consideration. The definition also includes non-fungible token.
Q1. What is the scheme of taxation for VDA for FY 21-22?
Ans- There was no scheme for taxation of VDA for FY 21-22, because the scheme for taxation of VDA was only introduced in the Finance Bill, 2022 which govern the financial proposals for financial years 2022-2023. It would not be out of place to submit herein that during FY 21-22, the government had published the National Strategy on Blockchain which highlighted several regulatory guidelines for Blockchain companies. During FY 21-22, the Companies Act, 2013 was also amended whereby companies were required to disclose profits and losses on cryptocurrency transactions as well as amount of cryptocurrency held.
Q2. What is the scheme of taxation for VDA for FY 22-23?
Ans- The Finance Act, 2022 which governs financial proposals for FY 22-23 have introduced taxation of Virtual Digital Assets which is defined under section 2(47A) of the Income Tax Act, 1961. A VDA is any information, code, number and token generated cryptographically and providing a promise of having inherent value and digital representation of value with or without consideration. The definition also includes non-fungible token. Further section 115BBH has been inserted which provides for charge of tax on income from transfer of VDA at a flat rate of 30% (thirty percent) as well as applicable surcharge and cess, which essential means that gains arising out of VDA transaction will be treated as capital gains. The section further provides exception that no deduction for any expenditure or allowances or set off of any loss, apart from deduction for cost of acquisition, shall be available and also the losses from transaction in VDA shall only be set off against gains from transactions in VDA and shall not be available for set off against any other income. Lastly, such loss shall not be allowed to be carried forward to subsequent assessment years. Further section 194S inserted to the Income Tax Act provides for deduction of tax on payment for transfer of virtual digital asset to a resident at the rate of one per cent of such sum, which is essential tax deductible at source.
Q3. What do you understand by “transfer” of “Virtual Digital Assets”?
Ans- Section 2(47) of the Income Tax Act, 1961 defines transfer as sale, exchange, relinquishment and extinguishment of any rights in a capital asset. The explanation to the definition further clarifies that transfer would include disposing of and parting with an asset, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. Lastly, Section 115BBH(3) of the Act provides that the definition of transfer as envisaged under section 2(47) shall be applicable to transfer of VDA. A combined reading of section 2(47) along with the explanation read along with section 2(47A) would reveal that transfer of VDA would mean sale, exchange, relinquishment, extinguishment of rights in a virtual digital asset through disposing of, and parting with that asset and/or creating an interest in a virtual digital asset by way of an agreement.
Q4. Explain the meaning of Short Term & Long Term Capital Gains. How long does an investor need to hold a VDA to classify it is as long term?
Ans- Section 45 of the Income Tax Act, 1961 defines capital gain as any profit or gain from the transfer of a capital asset and such profit or gain is taxable. there
- Short Term Capital Gains
This is the tax payable in terms of Section 111A of the Act, on profits or gains made on transfer of short term capital asset as defined under section 2(42A) of the Act.
- Long Term Capital Gains
This is the tax payable in terms of Section 112 of the Act, on profits or gains made on transfer of short term capital asset as defined under section 2(29A) of the Act.
It is pertinent to mention herein that there are exceptions to each short terms and long term capital gains, but none of these expectations have been carved out for VDA. The amendments have provided for a flat tax rate of 30% on any transfer immaterial of whether the VDA was held for a short term or long term, so whether or not an investor holds VDA for a day or for a year, immaterial of the time the VDA is held for, 30% tax shall be levied on the income along with other cess and surcharge and 1% tax deductible at source.
Q6. Section-87A of The Income Tax Act, 1961 talks about rebate upto Rs. 12,500. In case of a resident individual having its income from “only” from VDA, will he eligible for a rebate U/s-87A?
Ans- Any resident individual can use the rebate provided under Section 87A of the Act to reduce their income tax liability if their taxable income is upto Rupees 5,00,000/- (Rupees Five Lacs). The amendments under the VDA scheme of taxation merely require levying 30% income tax on the transfer of VDA, but no exception has been carved out in Section 115BBH which restricts an assess to use the benefits of rebate under Section 87A. It is pertinent to mention herein that the tax levied on transfer of VDA has not been classified as ‘capital gain tax’ and is merely a tax slab that has been provided, hence the interpretation of Section 112A(6) cannot be used in assessing the tax levied under Section 115BBH, and thus resident individual would be eligible for rebate under Section 87A of the Act.
Q7. Section-115BBH(2) prohibits carrying forward & set-off of losses from VDAs wef AY 2023-24. However, there will be persons who will have losses from AY 2022-23 and preceding years. Can such losses be carried forward & set-off against income from VDA/any other income in AY 2023-24. Discuss in the light of CIT v. Shah Sadiq & Sons [SC] .
Ans- No, such losses cannot be carried forward & set-off against income from VDA in AY 2023-24. The amendments to Section 115BBH under the Finance Act, 2022 shall come into effect from 01.04.2023 for AY 2023-24, so the losses cannot be carried forward and set-off against income from VDA in AY 2023-24, but the losses can be carried forward & set-off against income from VDA for AY 2022-2023 since the amendment does not take away the right accrued to the assess before to the period relating to prior AY 2023-24. The hon’ble Supreme Court in the matter of CIT vs. Shah Sadiq & Sons, has largely dealt with a right accrued after repealing of an enactment and the same shall not apply to the matter in hand. In the current factual matrix, it must be seen that the no right under the Act has been repealed rather an exception to setting off and carrying forward losses has been carved out in respect of transfer of VDAs. Several other such expectations like loss under capital gains cannot be set off against income under heads of income, losses in horse racingloss from business specified under Section 35AD etc.