Decrypting India’s new crypto tax regime: What you need to know

During her Union Budget 2022 speech on February 1, Finance Minister Nirmala Sitharaman announced that income from the transfer of any virtual digital asset (VDA) will be taxed at the rate of 30 percent.

This means income from the transfer of all types of cryptocurrencies and NFTs will be taxed at a flat rate of 30 percent.

She added there would be no deduction possible in any expenditure or allowance while computing income from the transfer of digital assets, except the cost of acquisition of the VDA.

"Loss from transfer of virtual digital assets cannot be set off against any other income, and gifting virtual digital assets will be taxed in the hands of the recipient," she said in her speech.

Although India's blockchain and crypto industry is still awaiting the Crypto Bill to define these digital assets more clearly, leaders from the nation's top crypto exchanges reacted positively to both the new digital assets tax regime and CBDC rollout plans.

While we wait, across crypto channels and communities on social media, numerous conversations and debates continue about the nature of the crypto tax and what the particulars of the accompanying Finance Bill entail.

Zerodha’s Nithin Kamath also tweeted his take on the new tax regime:

Here is The Decrypting Story’s breakdown of some of the top entries from the bill in relation to the new crypto tax.

115BBH

A new section in the Income Tax Act, namely 115BBH will be inserted with effect from April 1, 2023. It comprises rules stating:

(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset (VDA), the income tax payable shall be the aggregate of

(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty percent; and

(b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).

The Decrypting Story takeaway: Even if an individual has zero taxable income, they will pay the tax as applicable on their income (amounting to zero) plus the VDA tax at 30 percent without any deduction except the cost of acquiring the VDA. Other deductions allowed, in the old regime, under Sec 80C, 80D, and the likes, cannot be utilised here.

(2) Notwithstanding anything contained in any other provision of this Act,

(a) no deduction in respect of any expenditure (other than the cost of acquisition) or allowance or set-off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) no set-off of loss from the transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

The Decrypting Story takeaway: Set-off of other losses not allowed while computing the tax liability arising from VDA. Further, any loss arising from VDA cannot be used for set-off profit from other avenues, nor can it be carried-forward in the subsequent financial year.  

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194S

Insertion of new section 194S with effect from July 1, 2022, stating:

(1) Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one percent of such sum as income-tax thereon:

The Decrypting Story takeaway: One percent TDS is applicable on the transfer consideration of a VDA. So, when one is selling VDA, and if the consideration of that sale is Rs 10,000, then the TDS will be Rs 100 on that transaction.

Provided that in a case where the consideration for transfer of the virtual digital asset is

(a) wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or

(b) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such transfer, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.

The Decrypting Story takeaway: One percent TDS is applicable on the transfer consideration of a VDA has to be deducted irrespective of the mode of settlement of the transaction. Be it kind plus cash, or kind-only, the value of the transaction invites one percent TDS deduction, and the ‘person responsible’ is supposed to ensure compliance of TDS deduction.

(2) The provisions of sections 203A and 206AB shall not apply to a specified person.

The Decrypting Story takeaway: Section 203A is pertaining to having a tax deduction account or tax collection account as applicable. While Section 206AB provides for tax deduction at a higher rate where the person to whom payment is being made has not filed income tax returns.

(3) Notwithstanding anything contained in sub-section

(1) no tax shall be deducted in a case, where

(a) the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or

The Decrypting Story takeaway: The one percent TDS applicability is for individuals who are paid VDA consideration in excess of Rs 50,000 during a financial year.

(b) the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.

The Decrypting Story takeaway: While ‘person responsible’ is not defined within the ambit of VDA, this sub-rule means that if there is a person to person (P2P) transaction between VDA holders, and that value is below Rs 10,000 during a financial year, then the one percent TDS does not apply.

(4) Notwithstanding anything contained in this Chapter, a transaction in respect of which tax has been deducted under sub-section (1) shall not be liable to deduction or collection of tax at source under any other provisions of this Chapter.

The Decrypting Story takeaway: No deductions are permitted on the tax deducted or tax liability arising out of VDA related transactions.

(5) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

The Decrypting Story takeaway:  For taxable individuals where the value of VDA is above Rs 50,000 in a financial year, if they guise the credit from VDA transaction(s) in ‘suspense account’ or account by any other name, the credit will be deemed to be credit from VDA transaction(s) and the sub-rule(s) on taxability will apply.

(6) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the prior approval of the Central Government, issue guidelines for the purposes of removing the difficulty.

The Decrypting Story takeaway: The rules are in adhoc form, and Central Board of Direct Taxes (CBDT) will streamline these on the go.

(7) Every guideline issued by the Board under sub-section (6) shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person responsible for paying the consideration on transfer of such virtual digital asset.

The Decrypting Story takeaway: Streamlining changes if and when issued by CBDT, will apply to all stakeholders, after being presented to both the houses of the parliament.

(8) Notwithstanding anything contained in section 194-O, in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted under sub-section (1).

Explanation: For the purposes of this section “specified person” means a person:

(a) being an individual or a Hindu undivided family (HUF), whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;

The Decrypting Story takeaway: Specified person could be an individual or HUF whose annual sales/turnover from business is below Rs 1 crore, or below Rs 50 lakh in case of income from profession in the immediately preceding year in which VDA is transferred.

(b) being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”.

The Decrypting Story takeaway: Could also be an individual or HUF nothing income under the head ‘profit and gains of business or profession’. A ‘specified person’ is categorically mentioned where the VDA transaction value of Rs 50,000 in a financial year is breached, and Rs 10,000 in a financial year is breached in case of P2P dealing of VDA.