For a long time now, there were discussions about whether “Crypto” will be considered as a legal tender or not! The Budget 2022 announcement has made it clear that, in India, Crypto will be considered as a “Virtual Digital Asset” as per the newly inserted Clause 47A in Section 2 of the Income Tax Act, 1961.
Virtual Digital Assets (‘VDA’) means:
(a) Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) Non-fungible Token (NFT) or any other token of similar nature, by whatever name called;
(c) Any other digital asset, as the Central Government may, by notification in the Official Gazette specify.
In simple words, the virtual digital asset shall mean a cryptocurrency, NFT or another virtual digital asset as notified by the Central Govt. It will not cover subscriptions to any OTT platform, mobile applications, e-commerce platforms, etc.
The Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of a virtual digital asset subject to such conditions as may be specified therein. Such powers might have been given to the Central Govt. to exclude India’s first digital currency or Central Bank Digital Currency (CBDC).
Notably, Indian currency and foreign currency as defined under the Foreign Exchange Management Act, 1999, have been excluded from the ambit of VDAs.
While VDA includes cryptocurrencies, the definition can cover a wide variety of digital assets which is implied by the wording ‘or otherwise’ in the phrase “generated through cryptographic means or otherwise”. The definition is also made exhaustive with the words ‘information’, ‘code’, ‘number’.
The Government is in the process of passing The Crypto Currency and Regulation of Official Digital Currency Bill, 2021 but the same has been delayed as the Government is seeking technical inputs from RBI as RBI has concerns about private digital currencies citing macroeconomic and financial stability issues.
From the above is it clear to us that Crypto is not a legal tender but is considered as a Virtual Digital Asset. The question remains whether one can buy/sell or trade in it?
The Budget 2022 has announced an income tax @ 30% on the income from the transfer of digital assets with no set-offs allowed except the cost of acquisition being the only allowable deduction.
The loss on sale of digital assets cannot be set off against any other income nor allowed to be carried forward to subsequent tax years.
To regulate and capture details of the transactions, tax shall be deducted (TDS) @ 1% on the payment made to the seller of cryptocurrency by crypto exchange or any other payer, if the total payment during the tax year is above INR 10,000. The threshold limit for TDS would be INR 50,000 a year for specified persons which include individuals and HUFs who are required to get their accounts audited under the Income Tax Act. These provisions, applicable from July 1 2022, primarily requires the crypto exchanges to deduct taxes whenever required.
Gifting of digital assets will also be taxed in the hands of the receiver. The taxability will arrive only if the value of the Virtual Digital Asset exceeds INR 50,000 but there will be no tax liability in case of receipt of such assets through a relative as defined under the tax law on the occasion of marriage, etc.
The Income Tax forms from April 1, 2022 will have a separate column for making disclosures on gains made from crypto currencies and paying taxes.
Virtual Digital Assets (VDA) are now a part of Moveable assets under income tax Act Sec 56(2)(x).
The Reserve Bank of India has been working on the Central Bank Digital Currency (CBDC) for the past 18-24 months which will be issued by the Reserve Bank of India after considering risks like cyber-security and counterfeiting in mind. Work is in progress on wholesale and retail use of CBDC and it will be considered as another form of Fiat currency.
CONCLUSION: Currently, there are no laws in India that prohibit buying, selling or trading in cryptocurrency. Further, taxing on the profits of Crypto trading makes it clear that cryptocurrency is not illegal and Crypto Trading is legal. It also clarifies that Crypto is a legal and tradable asset. However, the heavy taxes levied on the income generated from dealings in Crypto and the TDS provisions coupled with the proposal to launch CBDC, clearly indicates the Government’s reluctance to give Crypto a “Currency” status. The Government is studying and analysing crypto and has no immediate plans to declare it as legal tender. However, what is important is that Crypto is here to stay.
(Rakesh K. Singh is an Advocate by profession and is the Founder Head of Law firm RKS Associate. He is also the Founder Head of NGO - Bharat Utthan Sangh. All views expressed in this article are his own.)
