Tax on Crypto Currency transactions- Much awaited tax proposal in Finance Bill 2022

There were speculations going over for a long time about banning or regulating cryptocurrency in India which has now been settled by the Finance Bill 2022. Finance Bill 2022 has proposed amendments in the Income Tax Act, 1961 thereby bringing transactions in cryptocurrencies under the tax ambit. In this article, we are elaborating on the proposal of the Central Government for taxing cryptocurrency transactions.

Tax on income from virtual digital assets

A new section 115BBH is proposed to be inserted by Finance Bill 2022 with an intention to tax income from virtual digital assets i.e. cryptocurrencies. This is a way forward to regulate transactions in the crypto market. Section 115BBH reads as follows:

Section 115BBH:

“(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of-

(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of 30%; and

(b)the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a)”

Analysis of Section 115BBH (1):

Income derived from the transfer of virtual digital assets by an assessee will be chargeable at a special tax rate of 30%.
Such income will be shown under the head “Income from other sources”.
The benefit of Basic Exemption Limit and income tax slab rate will not be available to such income from the transfer of virtual digital assets.
This provision if approved by the Parliament, will come into effect from 1^st April 2023 and thus, will apply, in relation to Assessment Year 2023-24 onwards. In simple words, any transfer of virtual digital assets on or after 1^st April 2022 will be subjected to tax at the special rate of 30%.

“(2) Notwithstanding anything contained in any other provision of this Act, -

(a) No deduction in respect of any expenditure (other than the cost of acquisition) or allowance or set-off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) No set-off of loss from the transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.”

Analysis of Section 115BBH (2)

It has been made clear that the assessee will not be allowed a deduction for any expenditure incurred by him in respect of the virtual digital asset. The only deduction that will be allowed is towards the cost of acquisition of such digital assets.
Further, no set-off of any loss under other heads of income shall be allowed against the income from the transfer of virtual digital assets.
Further, if any loss is incurred by the assessee from the transfer of the virtual digital asset, it shall not be allowed to be set off against income under any other head. Further, the loss will not be allowed to be carried forward to subsequent years.

Now, it is important to understand the definition of ‘Virtual Digital Asset’. For this, a new clause (47A) has been proposed to be inserted to section 2 of the Income Tax Act, 1961 as below:

Definition of Virtual Digital Asset

Section 2(47A): “Virtual digital asset” 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) a non-fungible token or any other token of similar nature, by whatever name called;

Provided that the Central Government may, by notification in Official Gazette, exclude any digital asset from the definition of the virtual digital asset subject to such conditions as may be specified therein.

Note:

non-fungible token means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

Gift of CryptoCurrency taxable

An amendment has been proposed in section 56(2) of the Income Tax Act. Section 56(2)(x) provides that where any person receives from any other person any sum of money or immovable property or any property other than an immovable property without consideration or without adequate consideration, the value of benefit so received shall be taxable under the head “Income from Other Sources”. However, such money shall not be taxable where the value of benefit so received does not exceed Rs. 50,000.

Explanation to Section 56(2)(x) states that the expression “assessable value”, “fair market value”, “jewelry”, “property”, “relative” and “stamp duty value” shall have the same meaning as respectively assigned to them in the Explanation to clause (vii) of section 56(2).

The Finance Bill, 2022 proposes to amend this explanation with a new one as below:

‘Explanation. ––For the purposes of this clause, –– (a) the expressions “assessable”, “fair market value”, “jewelry”, “relative” and “stamp duty value” shall have the same meanings as respectively assigned to them in the Explanation to clause (vii); and

(b) the expression “property” shall have the same meaning as assigned to it in clause (d) of the Explanation to clause (vii) and shall include virtual digital asset.’

Effect of the proposed amendment:

Cryptocurrency or virtual digital asset has been included in the definition of ‘property’. As such, if any transfer of cryptocurrency is made without consideration or with inadequate consideration to any person, the receiver of such cryptocurrency or the beneficiary shall be liable for tax. For this purpose, the fair market value of such cryptocurrency less consideration received will be taken into account for being included as per section 56 of the Act under the head “Income from other sources”. However, it seems that the Government has prepared in a bit hurry which has left many lacunas which might lead to future litigations. The above provision is applicable for A.Y. 2023-24 and onwards.

TDS on Cryptocurrency or virtual digital asset

Further, TDS provisions have been proposed in respect of transactions in cryptocurrencies. Introducing TDS on the crypto trade is a masterstroke by the Government. Now, the Government doesn’t have to reprimand exchanges to give them data od crypto investors, the exchange will have to deduct and report TDS for each trade. For this purpose, a new section 194S has been proposed to be inserted in the Income Tax Act, 1961.

Section 194S reads as follows:

“(1) Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one percent of such sum as income-tax thereon.”

Analysis

The liability for deduction of tax at source is on the person who makes payment of consideration for transfer of a virtual digital asset.
Such payers can be residents as well as non-residents. Such payers may be crypto exchanges like CoinDCX, WazirX, or any other person making the off-exchange transactions.
TDS shall be deducted in the case where the payee is a resident in India.
TDS shall be deducted at the time of payment or at the time of credit to the account of the resident, whichever is earlier.
TDS shall be deducted at the rate of 1% of the consideration amount irrespective of the fact whether there is a loss or gain on transfer of such virtual digital asset to the payee.
The provisions of TDS u/s 194S shall be effective from 1^st July 2022.

“Provided that in a case where the consideration for transfer of the virtual digital asset is-

(a) Wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or

(b) Partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such transfer, the person responsible for paying such consideration shall, before releasing the consideration ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.

Analysis:

TDS is to be deducted even in the case the transaction is settled in kind. The person responsible for paying consideration in kind shall ensure that TDS is deducted @ 1% before releasing such consideration in kind.
Various crypto exchanges allow the exchange of cryptos with other cryptos and even there are various crypto swapping platforms that allow the swapping of one crypto token against the other. The proposed amendment has the effect that the crypto swapping exchange will also be liable to deduct tax at source @ 1% on consideration at the time of crypto swap order executed by it.
The proposed amendment states that the payer has to ensure that TDS is deducted even where the consideration is not sufficient to cover the TDS amount.

“(3) Notwithstanding anything contained in sub-section (1), no tax shall be deducted in a case, where-

(a) The consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year or

(b) The consideration is payable by any person other than specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.”

Analysis:

Sub-section (3) of the proposed section 194S lays down the threshold limit of TDS in the case of cryptocurrencies as below:

Where the consideration is payable by a specified person	Where the consideration is payable by a person other than specified person
No TDS deduction is required up to consideration or aggregate consideration of Rs. 50,000.	No TDS deduction is required up to consideration or aggregate consideration of Rs. 10,000.

So, it becomes important to understand the meaning of “Specified Person” to check who is liable to deduct TDS and what will be the threshold limit for TDS in their case?

Explanation to Proposed Section 194S

“Explanation- For the purposes of this section “specified person” means a person, --

(a) Being an individual or a Hindu Undivided Family, whose total sales, gross receipts, or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of the profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;

(b) Being an individual or a Hindu undivided family, not having any income under the head “Profits and Gains of business or profession”.”

Analysis:

The definition of “Specified Person” covers only an individual or HUF. So, the benefit of the extended threshold limit of Rs. 50,000 is available only to individuals or HUF.
Other assessees like company, LLP or firm, etc. are liable to deduct TDS subject to a threshold limit of Rs. 10,000. Therefore, if they are making payment of consideration exceeding Rs. 10,000 towards the transfer of the virtual digital asset, TDS shall be deducted @ 1% of such consideration.
In the case of an individual or HUF, we have to check whether their turnover in the preceding financial year was up to Rs. 1 crore (in case of a business) /Rs. 50 Lakhs (in case of profession). If yes, such individual or HUF shall be treated as “Specified Person” and as such TDS shall be deducted by such individual or HUF subject to a threshold limit of Rs. 50,000 @ 1% of the consideration. Further, any individual or HUF who is not having any income under the head “Business or Profession” will also be considered as a “Specified Person”.
But if the turnover of such individual or HUF was exceeding Rs. 1 crore/ Rs. 50 Lakhs in the preceding financial year, such individual/ HUF will not be considered as “Specified Person”. As such, the threshold limit for TDS deduction u/s 194S (3) will be Rs. 10,000.
Please note that the threshold limit of Rs. 50,000/ Rs. 10,000 is to be checked for each payee on an annual basis.

Section 194S (2)

“The provisions of sections 203A and 206AB shall not apply to a specified person.”

Analysis of Section 194S (2)

Section 203A of the Income Tax Act provides that every person who is liable to deduct or collect tax at source is required to apply to A.O. for allotment of TAN. Such tax deductor/ collector shall quote TAN on every TDS/TCS challan or TDS/TCS returns.
However, Section 194S (2) states that section 203A shall not apply to a specified person. It means that a “specified person” is not required to obtain TAN from the Income Tax Department. This has been intentionally provided in the proposed law to relax small taxpayers (individual/ HUF) liable to deduct TDS u/s 194S from the requirement of obtaining a TAN.
Therefore, a question arises if TDS is deducted by a specified person u/s 194S, then, how he/ she will deposit TDS to the Government exchequer in absence of a TAN. For this purpose, the Government might bring a special TDS deposit mechanism similar to the case of TDS on immovable property u/s 194IA.
Further, the proposed sub-section 194S (2) provides that the provisions of section 206AB shall also not apply to a specified person. Please note that section 206AB provides a deduction of tax at source at a higher rate in the case of non-filers of return.

Section 194S (4)

“Notwithstanding anything contained in this Chapter, a transaction in respect of which tax has been deducted under sub-section (1) shall not be liable to deduction or collection of tax at source under any other provisions of this Chapter.”

In simple words, if tax has been deducted under section 194S, then there is no requirement of deduction or collection of tax at source under any other provisions of this Act.

Section 194S (5)

“Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense Account” or by any other name, in the books of accounts of the person liable to pay such sum, such credit of the sum shall be deemed to be the credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.”

Further, Section 194S (6) empowers the CBDT to issue guidelines for the purpose of removing difficulties in the application of this section.

Section 194S (8)

“Notwithstanding anything contained in section 194-O, in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted under sub-section (1).”

As per the above sub-section, if TDS is deductible under section 194-O as well as section 194S for any transaction, then the TDS shall be deducted u/s 194S.

About Author: The author of this article is CA Naveen Goyal. He is having an experience of more than 15 years in the field of Direct Taxation as well as Indirect Taxation. You can post him for further queries: ca.naveen80@gmail.com

Disclaimer: The above article is meant only for educational purposes and therefore, Taxwink is not responsible for any loss or damage caused to any person on account of the above information. Readers are requested to act diligently and under consultation with any professional before applying the information contained in this article.

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