Union Finance Minister Nirmala Sitharaman Tuesday proposed to tax “any income from transfer of any virtual digital asset” at a rate of 30 per cent and impose a 1 per cent tax deduction at source (TDS) of transactions above a monetary threshold.
While the upside is limited from a revenue mobilisation perspective, the step is important as it is the first formal recognition by the Government of increasingly popular financial instruments, such as cryptocurrencies, and applications, such as non-fungible tokens.
The imposition of a tax on these instruments is also an indication from the Government on implementing its stated plan of recognising them as assets and not currencies ahead of greater policy clarity that is expected by way of the proposed cryptocurrency Bill.
The imposition of TDS suggests a policy resolve to track the monetary trail in a sector that has so far been outside the purview of regulatory supervision or tax administration.
“Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill,” the explanatory memorandum of the Finance Bill notes.
It also specifically defines “virtual digital asset”, and includes non-fungible token in its ambit.
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Sitharaman, however, said the move should not be seen as the Government legalising or recognising virtual and cryptocurrencies. “There is a process of consultation, which is going on, about crypto. That is the first thing. Before the consultation is completed, I won’t be able to do anything on regulating them or formalising a framework for regulation for them,” Sitharaman told “Doordarshan” in an interview.
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Further, all forms of crypto or virtual assets cannot be placed under the umbrella term of currency as any form of fiat can only be issued by the authorities concerned, she said. “If they issue something, even if it is digital, only then can it be currency. What happens in the world of crypto otherwise is that they are creating very many types of assets using the digital and distributed ledger technology. All of them are not necessarily currencies,” she said.
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The Government has therefore proposed that the Reserve Bank of India would issue a digital currency in the upcoming financial year, she said, adding that it would be “riveted in or based on” certain value of gold, money, government assets or “something similar”.
“So it will be asset backed. It will be sovereign backed in a way. So that is what is currency. The rest of them, we do not yet know how we are going to regulate them because the consultation is going on. However, because there is a lot of buying, selling, and transacting, resulting in some kind of a profit, and it is a sovereign right to tax such transactions and profit making, I have come up with the proposal,” she said.
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Apart from the flat 30 per cent tax rate on any income from transfer of any virtual digital asset, Sitharaman has in the Budget also proposed a 1 per cent TDS of such consideration above a monetary threshold. Further, recipients of virtual digital assets as gifts will also have to pay a tax.
“No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital assets cannot be set off against any other income,” Budget documents show.
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Indian investors have put around Rs 45,000 crore in private cryptocurrencies. The RBI has been against private cryptocurrencies, saying they are a serious concern from a macroeconomic and financial stability standpoint.
The Government has proposed that the RBI’s digital rupee, also called the Central Bank Digital Currency (CBDC), will be issued using blockchain technology starting from the next financial year.
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The Central Board of the RBI had recently discussed various aspects, including the status of CBDC. RBI officials informed the board that a pilot project for the introduction of CBDC will be launched soon.
The RBI is now working on two areas: wholesale account-based and retail. While a lot of work has already been done on wholesale accounts, the retail issue is slightly complicated and the central bank is taking some time on it.
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CBDCs are the virtual or electronic form of fiat currencies (like the Indian rupee or US dollar). Other central banks such as the US Fed and the People’s Bank of China are also planning their own digital currencies. A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
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