Taxation framework of virtual digital assets (VDAs): An overview
Background
- VDAs have gained tremendous popularity in recent times and the number of users has also been increasing.
- The Hon’ble Finance Minister in her Union Budget 2022 speech mentioned that the magnitude and frequency of transactions in the VDA space have made it imperative to provide for a specific tax regime. With this background, a new taxation framework for VDAs was introduced in the Finance Bill 2022 to provide for taxation and withholding of tax pertaining to VDAs.
Taxation framework
Effective from 1 April 2022 onwards, any income from transfer of VDAs is taxable at the rate of 30% (plus surcharge and cess).
VDA has been defined in a wide manner to, inter-alia, include any information, code, number or token not being Indian or foreign currency, and generated through cryptographic means or others.
No deduction with respect to any expenditure or allowance (other than the cost of acquisition) will be available. Loss from transfer of VDAs is neither eligible to be set off against any income nor permitted to be carried forward.
In the event of gifting of VDAs, the tax payment would be made by the recipient.
For the purpose of withholding, section 194S was inserted with effect from 1 July 2022, which places an obligation on a person to ensure that tax is withheld at the rate of 1% at the time of payment/credit of any sum to any resident as consideration for the transfer of a VDA.
Overview of withholding tax provisions for VDAs
Essential elements of section 194S of the act
Briefly, section 194S of the act highlights the following key points:
Guidelines issued by the Central Board of Direct Taxes (CBDT)
The CBDT issued guidelines on 22 June 2022 to remove difficulties in the implementation of section 194S of the act.
The table below summarises the clarification provided by the guidelines with respect to withholding tax under section 194S.
Trade where a broker is the seller
- Tax may be withheld by the exchange that is crediting or making payment to the seller.
Trade where a broker is not the seller
- Broker can take responsibility to withhold tax, if there is written agreement between the exchange and broker.
Trade in cases where the VDA is owned by the exchange
- Primary responsibility to withhold tax is of the buyer or his/her broker.
- Alternatively, an exchange may have a written agreement with the buyer/broker that the former would pay tax.
- The exchange would be required to furnish a quarterly statement (Form No. 26QF).
Transfer of VDA for consideration in kind
- Existing law provides that tax has to be paid by the seller before consideration is handed over to him/her.
- An alternative mechanism is prescribed wherein an exchange can take on the responsibility to withhold tax, based on a written agreement.
- The exchange required to withhold and pay tax for both legs of the transactions.
- No further obligation is present on the buyer and seller pertaining to withholding tax.
Section 194Q vis-à-vis section 194S
- Once tax is withheld under section 194S, there is no withholding under section 194Q.
Consideration for withholding tax
- Tax is required to be withheld on the ‘net’ consideration after excluding GST, or the charges levied by the deductor.
Withholding tax where payment gateways are involved
- Payment gateways are not required to withhold tax if the tax has been withheld by the payer.
- Payment gateways could take an undertaking to this effect from the payer.
Calculation of threshold of INR 50,000 or INR 10,000
- Threshold of INR 50,000 (or INR 10,000) will be considered from 1 April 2022 onwards for FY 2022–23.
Credit or payment post 1 July 2022
- Any sum that has been credited or paid before 1 July 2022 would not be subjected to withholding tax under section 194S.
Our detailed alert on the guidelines can be downloaded here.
Further, another circular was issued, which provided the mechanism for withholding taxes on transactions other than those taking place on or through an exchange.
- Who is required to deduct tax when the consideration is other than in kind?
- Who is required to deduct tax where the consideration is in kind or in exchange of VDA?
Who is required to deduct tax when the consideration is other than in kind?
- Person responsible for paying such consideration – i.e. the buyer of VDA – is required to deduct tax.
- Tax is required to be deducted on ‘net’ consideration excluding GST.
Compliance
- The deductor is required to furnish a quarterly statement (in Form No. 26Q) for all such transactions.
Who is required to deduct tax where the consideration is in kind or in exchange of VDA?
- Person responsible needs to ensure that the tax has been paid before releasing the consideration.
- Thereafter, the buyer will release the consideration after seller provides proof of payment of tax (challan details etc.).
- In case consideration is in exchange of VDA, both parties will need to pay tax and show the evidence.
Compliance
- In both the aforesaid cases, the buyer is also required to furnish quarterly statements in Form 26Q/26QE.
Other clarifications
The CBDT also issued two other notifications, providing further clarifications regarding VDAs.
Exclusions from the definition of VDA [Notification no. 74 of 2022]
This notification excludes the following VDAs from the definition of VDAs:
- gift cards 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, loyalty cards, being a record (i) given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional programme (ii) that may be used or redeemed only to obtain goods or services or a discount on goods or services
- subscriptions to websites or platforms or applications.
Non-fungible tokens (NFTs)
NFTs are unique and non-interchangeable digital assets stored on a blockchain. The increased adoption of NFTs has facilitated the growth of the ecosystem as well as provided various use cases for their application.
Notification no. 75 of 2022 provides for the exclusion of the following NFTs from the definition of a ‘VDA’
In relation to the Indian tax provisions, the Government, vide a notification no. 75 of 2022, carves out the following NFTs from the definition of VDA:
A non-fungible token whose transfer results in the transfer of ownership of the underlying tangible asset, and the transfer of ownership of such underlying asset is legally enforceable.
