Budget 2022: Steep tax levies on digital assets, but hopes of legitimisation

In the absence of any regulatory framework or any specific tax regime, the fate of cryptocurrencies and other digital assets in India was shrouded amongst the clouds of uncertainty. 

However, despite such ambiguity and uncertainty, the trading of digital assets has continued to grow manifold. Considering such a surge in the trading of digital assets, the Finance Minister has introduced a specific regime for taxation of 'virtual digital assets', under Budget 2022. 

As per the proposed regime, the income arising from the transfer of virtual digital assets is proposed to be taxed at a flat rate of 30%.

Virtual digital assets are defined in a very wide manner, encompassing all forms of digital assets including Cryptocurrencies, Non-Fungible Tokens (NFTs), etc.

Also Read: Budget 2022: Income from transfer of virtual digital assets to be taxed at 30%, says Sitharaman

Income proposed to be taxed under this regime is required to be computed without giving effect to any deduction (other than cost of acquisition) in respect of any expenditure incurred in relation to the transfer or any allowance or set-off of losses.

Further, any loss arising on the transfer of such virtual digital assets would not be allowed to be set off against any income under any other heads. 

The Budget further pursues to plug all possible loopholes, to prevent such digital transactions from escaping the tax net.

Accordingly, to ensure proper reporting of transactions related to virtual digital assets, the Budget has proposed to introduce TDS at the rate of 1% on the transfer of virtual digital assets.

Similarly, the gift of virtual digital assets is also proposed to be brought to tax in the hands of the recipient, at the applicable rates. Thus, airdrops (i.e. giving out free digital assets to those with public crypto wallets to promote a new digital asset) may give rise to taxation in the hands of the recipients.

However, not all gifts are taxable, gift to relatives, or receipts by way of inheritance etc, continue to be exempt. 

Also Read: Budget 2022: 30% tax on digital assets is the first step towards regularisation

Further, it may be relevant to note that these proposed provisions would only become effective from April 1, 2022. Thus, if any virtual digital asset, including cryptocurrency or NFT, is transferred prior to April 1, 2022, these provisions would not be applicable.  

Having regard to the provisions in the proposed regime, it appears that this regime is prohibitive in nature. The government by introducing such an aggressive tax regime seems to place tax deterrents to disincentivise public participation in virtual digital assets.

However, despite the budget painting such a grim picture for virtual digital assets, the industry seems to be hailing this move of the government by viewing it as a step towards legitimisation.

In this context, the Finance Minister in her post-budget press conference has sought to curb such speculations.  

Even otherwise, considering that illegality of source income is not an impediment to tax income under the income tax laws, such proposed amendment in the tax laws would not in itself legitimise transacting in digital assets.

However, one may hope that these proposed amendments to tax laws eventually results in the government to formally recognise these virtual digital assets in India.  

Thus, it can be said that despite these tax proposals, the fate of cryptocurrencies and other digital assets in India continues to be a grey area, at least till the government comes up with a proper regulatory regime.  

(Kunal Savani, Partner; and Bipluv Jhingan, Associate Partner; Cyril Amarchand Mangaldas.)