Top 6 things you need to know about India’s crypto tax from the Finance Ministry

Budget 2022-23 dropped a tax bomb on the unregulated, wild-west world of cryptocurrencies in India. The Finance Bill 2022-23 seeks to insert a new section 115BBH relating to tax on income from virtual digital assets at the rate of 30 per cent, among other related provisions. While clarity on the taxation of cryptocurrencies was expected, what surprised most was the rate of the levy and the decision to allow no deduction of any losses when computing income from cryptocurrencies.

Business Today Television’s Siddharth Zarabi and Saskhi Batra spoke to top Finance Ministry mandarins who were involved in the process to understand the thinking that went into the decision and the rationale behind the specifics of the new tax regime for cryptocurrency income. Here's what the officials said. Edited excerpts.

J.B. MOHAPATRA, CBDT Chairman

BT: Is the government legitimising cryptocurrencies by taxing them?

JBM: The answer to your question is no. Taxation does not add or attach any legitimacy, any legality to the transaction which has been affected for accounting for surplus or deficit in a crypto trade. We as a department are not mandated to question a legality of any business, any sector of the business, any profession or any transaction. All we have been mandated is to look at the taxation aspect of the surplus which is generated after a trade.

Department is not mandated to question the legality of a particular line of trade or profession.  Just because it is taxed does not make it legal. That is the answer. Crypto trade may be declared illegal under the legislation but the profits on crypto trade will continue to be taxed.

As a department we have been working on various intricacies and the working of this crypto trade. For the last 5 years we have been working at it. And from different jurisdictions we have mounted semi-intrusive actions into their affairs and many exchanges and we now have a working knowledge of how crypto trade functions, how exchanges are managed and how investors make money or lose money. Our data will now be supplemented by the legislation. Now we are mandated to look at crypto trade as a line of business which is now given a place in the income Tax act under a special provision US 115PBH and TDS under 194S and it is clearly defined in section 294A as regards what constitutes a virtual digital asset. These three small but significant sections will allow a trader or an exchange to manage its affairs so that the taxation aspect of the trade can be worked out.

BT: How big is India’s cryptocurrency ecosystem?

JBM: We have some knowledge about the exchanges working in India. They are said to be 40. Out of these 10 are significant exchanges. And the biggest one has a turnover of 34,000 crore. So, the size of the market is quite large. Unconfirmed reports say that 10 crore of the population have invested in cryptos in one way or the other. In quantums ranging from very small to very large. We are not interested in looking at the quantum of investment, whether it’s big or small. We are interested in knowing the quality, the source of the investment. Whether it’s coming from a legitimate course and going to a legitimate course. Legitimacy of the source – we’ll always ask. If the investment is from illicit sources, not only will the trade surplus be taxed but the illicit investment will also be taxed. So that way, income tax getting into the crypto market will bring order and discipline to the market.

Tax is not an aspect around which somebody makes an investment. It may be a significant aspect but it is not the only thing driving someone to make an investment. There may be other factors. Taxation is just an aspect of it. What the IT department has done now is to tax the surplus at a particular rate. It neither legalises the trade or the surplus. Nor does it add any legitimacy to the trades conducted.

How to regulate the market? Who will be the regulator? How many stakeholders will be consulted to frame the national policy? These will be determined by the government on a later date. But prior to the formalisation of a national policy, the department has been given the onerous responsibility of looking at the taxation aspect. This has not happened before. This is first for the department to enter a market where there are ambiguities around regulation. This is a challenge and an opportunity for the department to get in there and understand the depth of the market.

BT: What are virtual digital assets? 

JBM: The definition of digital assets is provided in 247A of the IT Act. It says very simply that any code, any information or any formula generated through cryptographic means and which has an inherent value and which can be electronically transmitted and stored, including the NFT – which partakes the character or a digital asset. The currencies which are now being traded in India. I will not hazard a case of how many of them or all of them fulfil the criteria of being declared a digital asset. There are better brains to be looking at the definition and understanding the currencies.

BT: Isn’t 30 per cent too high a rate?

JBM: I don’t think it’s a high tax rate. Companies are being taxed at 30 per cent. Firms and LLPs too are taxed at the same rate. It is not the maximum rate. Thirty per cent is just one of the tax rates and I don’t think it is the upper end of the taxing powers of the government. No, it could have been more. There could be a revision. This is a tax rate which we thought was reasonable.

I don’t think it will have any impact whatsoever on any investor. Taxes on crypto trade are formalised. The bill has told investors that this is the way tax on surplus will be taken from you. So there is less of ambiguity and more of certainty when it comes to trade in virtual digital assets.

Watch the complete interview of J.B. Mohapatra here

Dr. T.V. SOMANATHAN, Finance Secretary

BT: What tax cryptocurrency in the absence of a law?

TVS: The Income Tax Act does not exempt any income other than Agri income. Income from cryptocurrencies has been taxable even before this law, it is taxable today and it will be taxable after April 1. What is changing is the regime of taxation. It is taxable even before April 1 but not at 30 per cent. It is taxable based on the classification of the income either as business income or as capital gain. It fits into different chapters of the IT Act and at appropriate rates. That is a bit confusing, because it creates a lot of uncertainty and potential for disputes. 

So all that is being changed and clarity on taxation is coming from April 1. But it is taxable even today. Let me be very clear. Nothing is exempt from taxes because it is unregulated. So if you speculate on horse races, it is taxable. We do not have a horse race regulatory authority of India. But it is still taxable. So everything is taxable unless it is exempted. Only agriculture income is completely exempted. It is not necessary that something should be regulated and there are many spaces. There is a space for legal regulated. There is a space for legal unregulated. And then there is a space of illegal. So crypto is not in the illegal space. It’s not yet in the legal and regulated space. It is in the space of legal and unregulated. But legal and unregulated is taxable. Even illegal is taxable. If an IAS officer takes a bribe, it is taxable. But crypto is not illegal.

Watch the complete interview of Dr. T.V. Somanathan here

TARUN BAJAJ, Revenue Secretary

BT: How much does the government hope to collect from the crypto tax?

TB: While we have worked a lot on cryptocurrency taxes, we have not gone into how much tax we will recover. This is the first time we have brought in a regimen and we will see how it happens. It is not important that we get Rs 1000 crore or Rs 5000 crore. I think the important part of that aspect which I'd like to say that we wanted to bring a certainty as to how the taxation will happen. 

Right now there is some confusion whether it is a long term capital gain (LTCG) if I hold it for more than a year, short term capital gain (STCG) or if I deal in derivatives, is it a business income or is it an income from other sources. And the tax rates would vary for each one of them.

High networth individuals pay 30 per cent tax or even up to 42 per cent. Even people like us ending up paying 34-35 per cent tax. In terms of the economy, you are contributing a lot, helping the economy grow. We don’t find this product serving an economic purpose like debt and equity do. No reason for us to have a tax rate lower than the highest marginal tax rate we are charging.

This is a new product which is there. We are trying to understand. I also have knowledge of what cryptos are and how they operate. I understand you can do it through an exchange and the exchange can itself do that. We can do it person-to-person also. Where no one is involved only our wallets are involved. So if we allow these losses to happen there is this fear we have that if I have profits from other sources, from my capital gains on which I would pay 10-15 per cent taxes, I can set it off because there is no such… once the regulations are there, we can take a call. But at this point of time, no one should play a game where he buys losses or buys profits and sets it off against other losses or profits or carries them forward.

The tax department has been doing some work on it. They have also visited a few, so-called exchanges to take information from them. There maybe 9-10 crore investors, with some investors in different exchanges, who may be not unique. There are 40 such exchanges functioning. We will now be culling out more information and because of the tax deducted at source provision, we will get more information every quarter.

We will have greater clarity and information.

We wanted to bring certainty on taxation. The government will take a decision on regulation.

Watch the complete interview of Tarun Bajaj here

Also read: Will 30% tax on digital assets trigger sell-off among cryptocurrency investors?

Also read: Crypto tax can go upto 43% for HNIs: Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP