Union Budget

2022
Taxation of Virtual
Digital Assets
February 2022

Sandeep Jhunjhunwala, Partner

Amendments proposed by the Finance Bill 2022
Definition – Section 2(47A)

▪ (I) Any information or code or number or token (not being Indian currency or any foreign currency),
(ii) generated through cryptographic means or otherwise
(iii) can be transferred, stored or traded electronically
(iv) providing a digital representation of value which is 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 and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred,
stored or traded electronically

▪ Non fungible token and any other token of similar nature are included in the definition

▪ Indian currency or foreign currency excluded from ambit of VDA, intent appears to be to let 'Digital Rupee' and private crypto assets to co-exist

▪ Condition of an asset having an inherent value appears difficult to be met given the nature of blockchain technology. May lead to dispute on an asset-by-asset basis

▪ Use of words 'information', 'code', 'number’ makes the definition of VDA very wide

New scheme of taxation - Section 115BBH

▪ Tax rate of 30 percent on income from transfer of VDAs

▪ No deduction of any expenditure or allowance or set-off of any loss allowed except cost of acquisition [Section 115BBH(2)(a)] – language similar to Section 115BBE for taxing cash
credits/ unexplained investments/ unexplained money/ unexplained expenditure etc

▪ No set off-of any loss arising from transfer of VDA to be allowed against any other heads of income. No carry forward of losses allowed to subsequent assessment years [Section
115BBH(2)(b)]

▪ Interplay between clauses (a) and (b) of Section 1115BBH(2) would require deliberations
Amendments proposed by the Finance Bill 2022

Withholding tax

▪ TDS to be applicable at the rate of 1 percent on consideration payable to resident. Amendment effective July 1, 2022

▪ Encompasses situations where payment is partly or wholly in kind or by way of exchange of VDAs

▪ Deductor to ensure tax is paid in above situation (where no cash consideration or cash consideration is not sufficient to discharge TDS liability) – Cost to the deductor

▪ If tax deducted under Section 194S, no tax to be collected or deducted in respect of said transaction under any other provision of Chapter XVII

▪ In case of a transaction where tax is deductible under Section 194-O along with proposed Section 194S, latter to override the former provision

▪ No tax is to be deducted in case the payer is a specified person and the value or the aggregate of such value of consideration to a resident is less than INR 50,000 during FY. In
any other case, the said limit is proposed to be INR 10,000 during FY

Who is a specified person?

Payer Criteria Aggregate consideration

Specified person • Individual/ HUF having turnover from business < 1 crore or turnover from profession < INR 50 lakhs * INR 50,000
• Individual/ HUF not having income under the head 'PGBP'
Other persons • Individual/ HUF having income under the head PGBP exceeding the above threshold * INR 10,000
• Corporates, Partnerships, LLPs, AOPs
* Thresholds to be tested during FY immediately preceding the FY in which VDA is transferred
Virtual Digital Assets – Key Considerations (1/3)
Cost of acquisition

▪ Section 115BBH does not define Cost of Acquisition (CoA) for a VDA. Whether definition provided in Section 55 be borrowed?

▪ Challenges in determining CoA for crypto miners and air dropped VDA since self-generated assets. Can principle laid down in CIT vs B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) be
applied - computation mechanism provided in 115BBH fails?

▪ Specific clarification warranted on application of FIFO method - parallel could be drawn from transfer of shares held in DEMAT account

ETR Interplay
Mining of crypto
Transaction Taxability ETR Taxable value

▪ Would expenses incurred be considered as CoA? Gift of VDA IFOS 5.2% - 42.74% FMV
Transfer of VDA Sec 115BBH 31.2% - 42.74% Consideration less CoA
▪ Expense not allowed as deduction - would CoA be Nil?

▪ Would this be business income and hence expense allowed – Set-off and carry forward of loss
22 percent vs 30 percent rate of tax Income Loss Same FY Set-off allowed?
Bitcoin Bitcoin Yes Yes
Bitcoin NFT Yes Yes
Sale of crypto received as gift
Bitcoin Ethereum No No
▪ Would FMV of crypto be considered as CoA in hands of recipient in
case of secondary sale? Bitcoin House Property Yes No
Bitcoin House Property No No
▪ Price volatility, determination of FMV?
Virtual Digital Assets – Key Considerations (2/3)
TDS
provisions
applicable
from
July 1, 2022
Consideration in kind
TDS provisions are applicable
on 'in-kind' payments. This
could lead to cash flow issue for
the payer, as the onus is on
payer to arrange for funds to
deposit taxes with the
Exchequer
TDS to be applicable at the rate of 1 percent on consideration payable to resident
Interplay with 194Q/ 194C
While the Finance Bill 2022
provides that Section 194S
would override Section
194-O, there is no clarity on
interplay between Section
194S and other sections such
as 194Q/ 194C
Lending of crypto/ VDA
Gross vs net Crypto Exchanges have
developed innovative products
Exchange of VDA such as offering interest to
More clarity is required on
investors on lending of crypto
whether the obligation to deduct
In case of an exchange, both assets to the Exchange. Periodic
tax would be on the sale
buyer and seller could be under interest accrues to the investor in
consideration or on the
an obligation to deduct taxes the form of a VDA.
consideration, net of charges
as both are paying a
consideration in exchange for Under this scenario, whether
transfer of a VDA withholding provision under
Section 194A or Section 194S
apply on interest income?
Virtual Digital Assets – Key Considerations (3/3)
Section 56(2)(x) – Taxability of Gift of VDA - Amendment effective AY 2023-24

Property Gift tax Exemption Tax rate

Explanation to Section 56(2)(x) FMV of a VDA to be taxable in Gift received from relatives, on Rate of tax in the hands of
amended to include VDA in the hands of the recipient, if occasion of marriage etc recipient of gift would be as
definition of property such value exceeds INR continue to be exempt per normal tax rate
50,000

Fair valuation of VDAs could pose challenges due to volatile Whether VDAs received on events such as Airdrops taxable as
nature of crypto assets gift?

Definition of the term "transfer" in the context of VDA

VDAs are not included in

definition of capital asset – can
still guidance be taken from
Section 2(47) which provides
definition of transfer in relation
to capital asset
Whether relinquishment/
extinguishment of rights or Would 'wallet to wallet 'or
Would transfer mean transfer of
conversion of capital asset to 'exchange to wallet’ be
risks and rewards?
business stock (and vice versa) considered as a transfer?
get covered?
Points to Ponder

Section 194S covers payments made to residents, it is unclear how withholding provisions, if at all,
would apply for payments made to non-residents as it is unclear if in-kind payments will also be covered
within the ambit Section 195?

Clarity
Whatonare
transactions thatthat
the regulations have takenforeign
govern place payments
prior to April
1, 2022
made through personal credit cards issued in India?

No amendment in Section 49 of the IT Act. Recipient of VDA as gift to

get benefit of step-up cost of FMV?

What happens to VDAs that are recognised as sovereign currency by some countries, say for
instance Bitcoin recognition as official currency by El Salvador? Falls under exclusion category?

Characterisation of income streams to a miner, a buyer or a secondary seller may not be clear in tax treaties. Could
lead to issues in claiming FTC and potential cases of double taxation or double non-taxation when one of parties in a
VDA transaction is a non-resident
Case Study 1: Key implications for Miners

Mechanics

▪ Crypto assets mined using blockchain technology Sale of Ethereum

▪ Miner creates a block on blockchain by solving complex mathematical equations (hashing)

Exchange
▪ Miner gets blockchain generated reward in the form of a crypto asset Miner

▪ Miner subsequently sells the crypto asset on an exchange platform

Key Considerations
Invests in
equipment, Mining Reward -
VDA received by miner from blockchain network as a reward for hashing Ethereum
incurs
expenses
As the VDA comes into existence through the process of mining, it should not be considered as a 'receipt’
in the hands of the miner under Section 56(2)(x) as the word receipt should imply transfer of an already
existing VDA - comparable to fresh issue of shares [Khoday Distilleries – 307 ITR 312 (SC)]

Subsequent sale of VDA by miner

Hashing
▪ Income from sale taxable at the rate of 30 percent under Section 115BBH

▪ Would expenses incurred for mining be considered as CoA?

Mining Blockchain
▪ Exchange to withhold tax at 1 percent on sum payable as consideration to miner Equipment Network

▪ Whether business income for miner? Can it be taxed as ‘PGBP’ income?

Case Study 2: Peer-to-Peer trading

Mechanics

▪ Seller to sell VDA through an exchange platform 5

▪ Exchange platform facilitates P2P transactions and safeguards users on platform by implementing Bybit credits
systems like escrow account, public ratings, feedback etc bitcoin to
Buyer’s
wallet and
▪ Buyer to pay mutually agreed consideration to seller
charges
Buyer commission
3
Key Considerations
Consideration 1 Exchange
transferred through Agree
For Exchange one of many to trade
payment methods Bybit
▪ Obligation to withhold tax under Section 194S/ 194-O? provided by Bybit
▪ Applicability of EL 2.0 for non-resident exchanges?
2 4
For Seller Bybit Confirms
escrows the receipt of
▪ Income from sale taxable at the rate of 30 percent (excluding surcharge and cess) bitcoin and payment
▪ Obligation to withhold tax under Section 194H for high volume traders? charges
commission
For Buyer

▪ Obligation to withhold tax under Section 194S, as payment routed directly to the seller?
▪ Trigger of gift tax where the consideration payable is less than FMV of VDA? Seller
▪ Obligation to withhold tax under Section 194H for high volume traders?
Case Study 3: Trading through exchange wallets

Mechanics Buyer transfers funds from bank to

purchase Bitcoin
▪ Buyer and seller store Bitcoins in a crypto wallet

▪ Crypto wallet facilitates movement of Bitcoin through a crypto exchange

▪ Buyer and seller unknown to each other Buyer Wallet

▪ Crypto wallet charges a transaction fee either from both the buyer and seller or from the crypto Exchange
Exchange debits money
exchange credits Bitcoin

Key Considerations Exchange

For Crypto Exchange Exchange

Exchange credits money
debits Bitcoin
▪ Obligation to withhold tax from Seller under Section 194S/ 194-O as exchange is responsible for
transferring money to crypto wallet of Seller?

▪ Applicability of EL 2.0 for non-resident exchanges? Wallet

Seller transfers funds to

bank
Seller
Case Study 4: NR-to-NR trading through an Indian exchange

Mechanics
Transfer of funds
▪ Resident of UK sells Dogecoin to a resident of USA through an Indian crypto exchange outside India Dogecoin
▪ Indian crypto exchange facilitates transfer of Dogecoin owned by UK resident to a resident of USA

USA Buyer
Key Considerations

For Indian Crypto Exchange

▪ How to determine the situs of Dogecoin owned by the Seller? Exchange

▪ Difficulty in determining situs – income of seller not deemed to accrue or arise in India? India WazirX

▪ Obligation to withhold tax on Indian Crypto Exchange from Seller under Section 194S/ 195?

For Seller

▪ Characterisation of income under the tax treaty could be a challenge

▪ Claiming FTC in country of residence for any crypto tax withheld in India pose a challenge
Dogecoin

UK Seller
Case Study 5: Purchase of goods through VDA

Mechanics

▪ Seller sells goods of value INR 40 lakhs to buyer

▪ Buyer transfers VDA to seller as consideration for purchase of goods Sold goods worth INR 60 lakhs

Key Considerations
Seller of goods
For Buyer

▪ Sales value of VDA (INR 60 lakhs) less CoA to be taxable at the rate of 30 percent
Discharges
consideration by
▪ Obligation to withhold tax under Section 194Q? paying 2 BTC

For Seller

▪ Obligation to withhold tax at the rate of 1 percent under Section 194S

▪ Cash flow issues to discharge withholding obligations

Buyer of goods
Case Study 6: VDA received from employer

Mechanics Subsequent sale of VDA

by employee
Employee is remunerated through a VDA for good performance at work

Key Considerations

For Employee
Employee
▪ Receipt of VDA treated as regular remuneration and taxable as perquisite?

▪ Receipt of VDA treated as gift? Would services rendered by employee be akin to consideration making
gift tax inapplicable?
VDA given to employee
For Employer as compensation for
performance
▪ Obligation to withhold tax under Section 194S vs 192?

▪ Would the VDA be considered as a monetary perquisite?

▪ Obligation to withhold tax under Section 192 or under Section 192(1A)?

▪ Issue of grossing up and bearing income tax liability

Subsequent sale of VDA by employee

Employer
▪ For HNIs having a total income > INR 5 crores, ETR could go as high as 42.74 percent on income
from sale of VDA
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