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Proposed taxability of Virtual Digital Assets

Proposed taxability of Virtual Digital Assets

The Union Budget 2022-2023, presented by the Finance Minister on 1st February 2022, came up with the new provisions governing taxing as well tracking of ‘Virtual Digital Assets’. With already hit-up topic vis-à-vis budget proposal, taxability of ‘Virtual Digital Assets’ is currently striking the market much.

Following provisions, relating to Virtual Digital Assets, are proposed to be inserted vide the Finance Bill, 2022-

  1. Section 2(47A) defines ‘Virtual Digital Asset’;
  2. Section 115BBH governs tax on income from virtual digital assets;
  3. Section 194S covers ‘Tax Deduction at Source’ with regard to virtual digital assets.
  4. Section 56(2)(X) inclusion of ‘Virtual Digital Asset’ within the definition of ‘Property’.

The present article briefly explains all the provisions and taxability of ‘Virtual Digital Asset’ as proposed vide the Finance Bill, 2022.

Coverage of the term ‘Virtual Digital Asset’-

A new clause (47A) is inserted to section 2 which defines the term ‘Virtual Digital Asset’. Accordingly, the term means as under-

  • Any information/ code/ number/ token which is generated through cryptographic means/ otherwise which provides a digital representation of value that is exchanged with or without consideration. It functions as a store of value/ unit including its use in any financial transaction/ investment; or
  • Any digital asset notified by the Government; or
  • A non-fungible token (as notified by the Government)/ any other token of similar nature.

Taxability of Virtual Digital Assets-

As per newly inserted provisions of section 115BBH, if the total income includes any income by way of transfer of any virtual digital assets, the tax will be payable in the following manner-

Steps Particulars
STEP 1 Tax will be payable @30% on the amount of income received from the transfer of the virtual digital asset.

Total income including virtual digital asset               XXX

(Less) Income from transfer of virtual digital asset (XXX)

Balance income on which tax payable                      XXX

Other important points to be kept in mind with regard to taxability of the virtual digital assets-

  • The cost of acquisition will only be allowed as a deduction.
  • Any other deduction or any expenditure will not be allowed as a deduction.
  • Set off of loss from the transfer of digital asset will also not be allowed against income computed under any other provisions of the Income Tax Act.
  • Loss on account of the virtual digital assets will not be allowed to be carried forward to the succeeding assessment years.

It is important to note that the provisions of section 115BBH will be applicable with effect from 1st April 2023.

Tax deduction at source vis-à-vis virtual digital assets-

The Finance Bill, 2022 proposed to insert new section 194S which covers provisions relating to deduction of tax at source (TDS) with regard to digital assets transaction. Accordingly, the provisions are briefed hereunder-

Particulars Details
Person liable to deduct TDS under section 194S Any person who is responsible for paying any sum, to a resident, by way of consideration for transfer of a virtual digital assets.
Time of deduction of TDS under section 194S

Earlier of the following-

·       At the time of credit; or

·       At the time of payment.

Rate of TDS TDS is deductible @ 1%
Exemption from TDS deduction

· When the consideration/ value of consideration, payable by the specified person, doesn’t exceed INR 50,000 during the financial year;

· When the consideration/ value of consideration, payable by the person other than a specified person, doesn’t exceed INR 10,000 during the financial year.

Coverage of the term ‘Specified person’ is explained below.

Important points · The person liable to deduct tax under section 194S is not required to obtain ‘Tax deduction and collection account number’ i.e., TAN.

Specified person means-

  1. A person being an individual or HUF whose total sales or gross receipts or turnover doesn’t exceed INR 1 Crore in case of business (INR 50 Lakhs in case of profession) during the Financial Year in which the virtual digital asset is transferred;
  2. A person being an individual or HUF who is not having any income under the taxable head of “Profit and gains of business or profession”.

Importantly, the provisions of section 194S are made effective from 1st July 2022.

Taxability due to inclusion of ‘Virtual Digital Asset’ within the definition of ‘Property’-

As per the amendment, with effect from 1st April 2023, the expression ‘Property’, covered under section 56(2)(X), will include the term ‘Virtual Digital Asset’. Accordingly, the amendment will have the following effects-

  • Cases, wherein, the digital asset is transferred without any consideration, the tax will be calculated as per provisions of section 56(2)(X).
  • Tax will be payable as per section 56(2)(X) only when the aggregate value exceeds INR 50,000.