TAXATION LAW ASSIGNMENT

LAVANYA KOHLI

20010768

BALLB 2020 (A)

TABLE OF CONTENTS
ASSUMPTIONS -.............................................................................................................................................1
INTROUDCTION / BACKGROUND...........................................................................................................2
STEP 1- IDENTIFCATION AND CLASSIFICATION....................................................................................3
STEP 2 – TAX ON CRYPTOCURRENCY AND NFT INHERITED BY MR. X..............................................................5
STEP 3 – ADVISE ON POTENTIONAL SITUATIONS AND APPLICABILTY OF TAX................................6
STEP 4 - APPLICABLE CESS/ SURCHARGE AND DEDCUTION..............................................................7
STEP 5 - TAX DECUCTED AT SOURCES (TDS) PROVISION..............................................................................8
STEP 6 - REPORTING REQUIREMENT......................................................................................................10
LEGAL DEVELOPMENTS –........................................................................................................................11

ASSUMPTIONS -

 Mr. X and the deceased relative both are/were Indian resident and citizens.
 Only Indian laws are applicable to the current case.
 Mr. X inherited the VDA in the year 2023-24, tax rate applicable here will be as per
finance act 2023, for the income earned in the year 2023-24.
 All activities carried out by Mr. X are within the jurisdiction of the Indian
Government.
 Notification 75/2022, is not applicable to NFT in this case.

1
INTROUDCTION / BACKGROUND

The evolution of Cryptocurrency in India can be broken down into 3 major phases primarily.

 Phase 1 (2013-17) – India during this phase had a cautious approach towards digital
assets, this is certain from the RBI regulations and notification that cautioned the
general public about cryptocurrencies and highlighted risks of fraud, illicit activities.
This was also the time when government set up the Inter-Ministerial Committee (IMC
hereafter) which was constituted to set up various issues of virtual currency.
 Phase 2 (2018-19) – India herein approached a crackdown and conservative approach.
In the budget speech of 2017, the Finance minister (Arun Jaitley) stated that
Government does not consider cryptocurrency to be a legal tender and it will take
measures to eliminate the use of such assets. In the IMC report of 2019 , it
recommended that all private cryptocurrencies to be banned in India .
 Phase 3 (2020 onwards) – the honourable Supreme Court set aside the 2018 circular ,
and held that the Supreme Court acknowledged that RBI had the power to regulate
cryptocurrencies, it said that the 2018 circular was an arbitrary and a disproportionate
measure because the RBI had no concrete data on whether cryptocurency had any
adverse implications on the entities which were regulated by it.

Although cryptocurrency has been present and around in India for the last ten years, the
primary debate around its legality began in April, 2018, 1 when the Reserve Bank of India
(RBI) using its power under the Reserve Bank of India Act, 1934 and Payment settlement
Systems Act , 2007 issued a circular advising banks not to deal in crypto-currencies. This
2018 circular was struck down by the Supreme Court in case of Internet and Mobile
Association (IAMAI ) v. RBI.2 In this case it was contended that RBI had breached its

1
Notification- RBI/2017-18/154 DBR NO.BP.BC.104/08.13.102/2017-18.

2
Internet and Mobile Association (IAMAI ) v RBI, MANU/SC/0264/2020.

2
statutory duty by banning cryptocurrency, and this was a violation of Article 19(1)(g). 3
Further, this case discussed the doctrine of proportionality and court held that this circular
was against article 19(1)(g) and hence violative of fundamental rights. Court held that less
intrusive means could have been taken by the RBI, and there had been excessive use of
power. However in its concluding remark court kept the cryptocurrencies under the purview
of RBI, “ anything that may pose a threat to or have an impact on the financial systems of the
country, can be regulated or prohibited by RBI, despite the said activity not forming part of
the credit system or payment system”. 4After this landmark ruling on May 31 st , 2021 RBI
issued a fresh circular advising banks not to rely on the 2018 circular while cautioning the
customers.5

STEP 1- IDENTIFCATION AND CLASSIFICATION

The first step to guide Mr. X will be identification of the assets that have been inherited by
him.

As per Section 2(47A)6 of the Income Tax Act, 1961 (IT Act, hereafter), Crypto and NFTs
are categories as “Virtual Digital Assets” (VDA hereafter). As per this section, VDA takes
into account, crypto assets, including NFTs, tokens, Cryptocurrencies under its ambit.

As per the question it states that Mr. X inherited “substantial amount of digital assets ,
including cryptocurrencies and non-fungible tokens [NFTs]” this primary implies that he has
also inherited other assets apart from crypto and NFT. Hence there is a need of clarification
herein to be made by Mr. X. However, being the legal adviser, one has to inform Mr. X
regarding two important notifications -

3
Satish Kumar, “LEGAL STATUS OF CRYPTOCURRENCY IN INDIA”
<https://www.researchgate.net/publication/370635209_LEGAL_STATUS_OF_CRYPTOCURRENCY_IN_IN
DIA> accessed 10 October 2023.
4
Ibid.
5
Notification - RBI/2021-22/45 DOR AML REC 18/14.01.001/2021-22.

6
S. 2(47A) Income Tax Act 1961.

3
Referring to notification no. 75/2022 of the ministry of Finance,7 which states -

“ In exercise of the powers conferred by clause (a) of Explanation to clause (47A) of section
2 of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred as ‘the Act’), the Central
Government hereby specifies a token which qualifies to be a virtual digital asset as non-
fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but
shall not include a nonfungible token whose transfer results in transfer of ownership of
underlying tangible asset and the transfer of ownership of such underlying tangible asset is
legally enforceable.”

This basically implies that there are exceptions that certain NFTs are excluded from being
classified as virtual digital assets for tax purposes, to illustrate -

(i) Ownership of Tangible Assets- If an NFT represents ownership of a tangible,

physical asset, and transferring the NFT also results in the transfer of ownership of
that tangible asset, it falls outside the definition of a virtual digital asset.
(ii) Legally Enforceable Transfer- The ownership transfer of the underlying tangible
asset must be legally enforceable. This means that the transfer of both the NFT
and the associated physical asset should be recognized and upheld by the law. If
the transfer is not legally binding or enforceable, it doesn't meet this exception.

Let’s assume, if NFT of a piece of painting is traded and the actual piece of painting also
is exchanged as a part of that very transaction then the sale of painting will not attract the
same amount of taxes as those applied on VDA.8

For the purpose this question, it is assumed that NFT does not fall under this exception of
notification 75/2022, and hence this is negated.

7
Notification No. 75/2022/F. No. 370142/29/2022-TPL (Part-I).

8
Lalit Munoyat, ‘Taxation of Crypto & Virtual Digital Assets: Set off of Loss on Sale of VDA against Profit on
Sale of Other VDA” (TaxGuru 2023) <https://taxguru.in/income-tax/taxation-crypto-virtual-digital-assets-set-
off-loss-sale-vda-profit-other-vda.html> accessed 10 October 2023.

4
Secondly , as per notification no. 74/2022 –

(i) Gift card or vouchers

(ii) Mileage points, reward points or loyalty card, being a record given without direct
monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or
promotional program that may be used or redeemed only to obtain goods or services or a
discount on goods or services;

(iii) Subscription to websites or platforms or application

All these do not come under the ambit of VDA. This is necessary to be told so that Mr. X
knows what all can come under VDA. However, by the purview of section 2(47A), both NFT
and Cryptocurrency can be classified as “VDA”.

STEP 2 – TAX ON CRYPTOCURRENCY AND NFT INHERITED BY MR. X

Section 569 talks about income from other sources. Further an amendment is made to the
Explanation of section 56(2)(x)10 of the act, which widened the scope of the term “property”
such that includes VDA in its ambit . Section 56(2)(x) explanation (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 assets.”

Receiving VDA from a relative without any consideration shall be considered as income
from other sources and will be taxable under Section 56 . However, as per section 56(x)(c)
proviso, exempts property received under a will or way of inheritance to be taxed.

In our particular case, Mr X has received crypto + NFT = VDA, which is considered a
property. It was received by way of inheritance and hence is exempted from tax by the virtue
of exceptions provided in Section 56(2)(X)(c)(iii).

However , one may wonder if inheritance tax will be levied in such a situation. In India there
is no provision for levying of inheritance tax. This tax was abolished way back in the year

9
S. 56 Income Tax Act 1961.

10
S. 56(2)(x) Income Tax Act 1961.

5
1985, before which a high ‘estate duty’ of up to 85% of the value of the inherited property
had to be paid by the executors of the estate of the deceased under the Estate Duty Act, 1953.
Even though the assets that are passed on to legal heirs could be considered gifts, since they
are received without any consideration, no gift tax is levied because the Income-tax Act,
1961, keeps assets received as inheritance or through a will out of the purview of gifts.

Hence, these are not considered as income and one will incur no tax liability on the assets that
you receive as inheritance.11

STEP 3 – ADVISE ON POTENTIONAL SITUATIONS AND APPLICABILTY

OF TAX

The inheritance of VDA is not taxed, however if any further income is generated through it ,
that has to be taxable as per Section 115 BBH Income Tax Act (ITA).

Further, at this point Mr. X, has 3 possible options –

Firstly, if he holds onto this income and does not trade / sell it . In such a situation where
there is no transfer/sale or no realisation of gain/ loss, there will be no tax applicable .
However holding of cryptocurrency is considered as assets for tax purposes.

Further, Schedule “VDA”, has a choice between two heads of income, either the income
earned from VDA can be reported as income from capital gains or professional and business
income.12

Primarily, if Mr. X , holds VDAs for sale in the regular course of business, the profits from
such transactions should be taxed as business income. Let’s say for the purpose of trading.
However on the other hand if Mr. X holds these VDA’s as long term investment it will be
considered as capital gains. Therefore, depending on the nature of VDA ownership and its
purpose (trading or investment), the income will be categorised and taxed accordingly under
either the head of business income or capital gains.
11
Riju Mehta, “Do I need to pay tax on my inheritance?” Economic Times (17 July 2023).
12
Naveen Wadhwa, “How to report income from cryptocurrencies, NFTs, Virtual Digital Assets (VDA) in ITR
form” Economic Times (31 July 2023).

6
Under both these situations , as per section 115 BBH ITA, 13 any income of an assessee
arising from the transfer of a VDA will be taxed at the rate of 30% on the sale consideration
plus tax on other sources of income excluding VDA. Further the same amount of Cess/
Surcharge and deductions will be subjected under both the heads.

STEP 4 - APPLICABLE CESS/ SURCHARGE AND DEDCUTION

 Deduction : The only deduction that is permitted in the case of VDA shall be the
acquisition cost if any. Further no other deduction of expenses and set off of losses are
allowed in computing the income from the transfer of VDA under any provision of the act.
Further, as section 115BBH has an overriding effect over the other provisions of the Act. 14 In
this particular case, there will be deduction of the acquisition cost when Mr. X further sells or
transfers the VDA , since Mr. X got this property in inheritance the acquisition cost is the
amount of purchase price for previous owner as per Section 49 of the Income Tax Act. 15
Previous owner in this case is the relative from whom the VDA was acquired.
 Surcharge : As per Schedule 1 of the Income Tax act, if the income of VDA exceeds
50 lakhs there is an additional surcharge as per S. 2(3) of the Finance Act, 2023. 16 However
this surcharge is not a tax on tax and will depend on the income earned from the transfer of
VDA. This surcharge will be applicable as a certain percentage of the applicable tax.
As per section 2(3) of Finance Act –
1) Exceeding 50 Lakhs but under 1 Crore – 10% of applicable tax.
2) Exceeding 1 Crore but not exceeding 2 Crore – 15% of applicable tax.
3) Exceeding 2 Crore but not exceeding 3 Crore – 25% of applicable tax.
4) Exceeding 5 Crore – 37% of applicable tax.

13
S. 115BBH Income Tax Act 1961.

14
Mehul Jain and Gopala Rao, “Nitty-Gritties of Direct Taxation on Transfer of Virtual Digital Asset”
(Foxmandal, 10 June 2022) <https://www.foxmandal.in/Insights/nitty-gritties-of-direct-taxation-on-transfer-of-
virtual-digital-asset/> accessed 10 October 2023.
15
S. 49 Income Tax Act 1961.

16
S. 2(3) Finance Act 2023.

7
 Cess : As per Section 2(11) of the 2023, Finance act,17 surcharge under sub section (3)
of S. 2 , will also include 4% additional surcharge as a part of health and education cess on
income tax.

STEP 5 - TAX DECUCTED AT SOURCES (TDS) PROVISION

Further , there is also a need to comply with the TDS provisions. As per section 194S, 18 the
payer (person who is paying the consideration to the other person on transfer of VDA) , has
to deduct tax at source in the name of the seller . This deduction has to be of 1%. TDS
should be deducted on the transfer of the VDA (Virtual Digital Asset) if the aggregate
amount during the financial year exceeds the threshold limit of INR 50,000 in the case of
specified persons or INR 10,000 in the case of others. Further, under section 206AA there
is also a need to quote the PAN to the taxpayer responsible for paying such a sum of
income.

Regardless of the fact , whether Mr. X is selling or trading VDA he has to bear this liability.
Further, tax liability under S. 194S is independent of that under S. 115BBH, which implies
that both need to be applied independently. Further there is no surcharge or cess applicable
herein.

In case of P2P transactions , buyer has to deduct the TDS and file form 26 QE and 26Q ,
whichever is applicable. However in case of crypto to crypto transaction, TDS will be
applicable on both buyer and seller at 1%.

Section 194 S, mentions some exceptions as well-

There is a threshold limit of INR 50,000 applies in the case of specified persons and 10,000
in case payer is anyone else. Specified persons cover Individual or HUF having:

 No income from business or profession OR

17
S. 2(11) Finance Act 2023.

18
S. 194S Income Tax Act, 1961.

8
  Business Income of up to INR 1 Crore or the Profession Income of up
to INR 50 lakhs.

Mr. X can reduce some part of tax liability by claiming these exceptions.

Further, The Central Board of Direct Taxes (CBDT) has issued certain important guidelines
in the form of Circular No. 13 of 2022 dated June 22, 2022 for transactions conducted on or
through an Exchange, as well as Circular No. 14 of 2022 for other transactions. The
Guidelines specifically clarify as regards the obligations and roles that the Exchange can play
as regards discharging the TDS, while recognizing the practical difficulties for crypto buyer
to determine whether the VDA being transferred is being owned by a seller resident in India
or otherwise, or by the exchange and thus determine, his/her liability to deduct TDS.
Further, for the purpose of TDS, GST will not be included in it.19

For further clarification20 -

STEP 6 - REPORTING REQUIREMENT

Before filing of the Income Tax Return (ITR), one has to fill form 10IE , which allows one to
choose between the new and old tax regime. The newer tax regime offers more tax slabs ,
lower tax rate but also has fewer deductions. However, as per section 115 BBH there is just
one deduction in any case for VDA which is the cost of acquisition. Further there is no

19
Stella Joseph and Yash Desai, “Gudelines on TDS transfer of Virtual Digital Assets” (ELP, 19 July 2022)
<https://elplaw.in/guidelines-on-tds-on-transfer-of-virtual-digital-assets/> accessed 10 October 2023.
20
Supra.

9
explicit, exclusion of this deduction under the new tax regime. However the choice of Mr. X
needs to depend on his other sources or taxable income as well.

The reporting requirement , in order to report income from VDA, depends upon the specific
head under which you are choosing to declare the income for taxation purposes. Any income
generated from the sale of VDA, must be reported in “Schedule VDA”. If Mr X decides to
report it as capital gains , he has to disclose it in ITR 2, on the other hand if he has to opt to
report it as business income, he has to disclose it in ITR 3. Further, currently although he has
to pay no tax by the virtue of inheritance he still has to made adequate disclosure and fill
details about his digital assets in exceptions under ITR 2.

Further, if Mr X sells the assets , TDS will be filed by the other party, Mr. X does not need to
concern about that. However in case of crypto to cyrpto transaction , under Rule 30(2D) of
Income tax rules, the TDS has to be submitted within 30 days from the end of the month
along with form No. 26QE.21

Further if Mr. X reports his income as capital gains , the due date for filing of the ITR is July
31. However if he will report it as income from capital gain , he has to compute the turnover
and if it exceeds the specified limit, accounts have to be audited in that case ITR due date will
be October 31st. However one must submit the audit report to the income tax department by
September 30. In case turnover is below specified limit , due date for filing the ITR is July
31st. However after passing of this limit, one can file belated ITR till December 31 st under
section 139(4) ITA.22

An individual is required to pay a late filing fee under Section 234F while filing belated
ITR.23 A penalty of Rs 5,000 will be applicable for all individuals filing belated
ITR. However, for individuals whose taxable income does not exceed Rs 5 lakh, a penalty of
Rs 1,000 will be applicable for filing belated ITR. An individual is required to pay this
penalty even if there is no tax payment required to be made.

21
Rule 30(2D) Income Tax Rules.

22
Neelanjit Das, “When is the last date to file relate ITR?” Economic Times (1 August 2023).
23
S. 234F Income Tax Act 1961.

10
If the total income is below the exemption limit, then no late fees will be levied while filing
belated ITR.24

LEGAL DEVELOPMENTS –

 The major legal development in this field has been the ‘Cryptocurrency and
Regulation of official digital currency bill, 2021’. Although this bill was scheduled to
be tabled in 2021 winter session, however that did not happen. This bill can be seen as
a step by the government to regulate cryptocurrency in India. This bill also prohibits
other private cryptocurrencies but with certain exceptions to boost the underlying
technology of cryptocurrency.25 Further, the RBI has also launched “central bank
digital currency” - (Digital Rupee) in a phased manner as an alternative to other
private cryptocurrencies.

 Further there has also been addition of VDA under the money laundering act,
extending its scope -

“ Central Government vide notification F.No. P-12011/12/2022-ES Cell-DOR dated March

07, 2023, has notified the following activities, when carried out for or on behalf of another
natural or legal person in the course of business as an activity for the purposes of sub-clause
(vi) of clause (sa) of sub-section (1) of section 2 of the Prevention of Money-laundering Act,
2002 (15 of 2003):

(i) exchange between virtual digital assets and fiat currencies;

(ii) exchange between one or more forms of virtual digital assets;

(iii) transfer of virtual digital assets;

24
Ibid.

25
Nikita Tambe, “All You Need To Know About India’s Crypto Bill” (Forbes Advisor, 5 May 2023)
<https://www.forbes.com/advisor/in/investing/cryptocurrency/crypto-bill/>accessed 10 October 2023.

11
 (iv) safekeeping or administration of virtual digital assets or instruments enabling
control over virtual digital assets; and

(v) participation in and provision of financial services related to an issuer’s offer and
sale of a virtual digital asset.”26

 Moreover, in a recent case of, Hitesh Bhatia v. Mr. Kumar Vivekanand,27 there were
some observations made regarding cryptocurrencies and VDA.

The court observed that –

1) Transactions in cryptocurrency have to comply with the general law in force in India
including Prevention of Money Laundering Act, 2002, Indian Penal Code, 1860 ,
Foreign Exchange Management Act, 1999 , the tax laws, and with the RBI regulations
mandating know your customer , Combating of Funding of Terrorism and Anti-
money Laundering Requirements;

2) Even in the absence of any specific law regulating or banning, or monopolising

cryptocurrency, only legitimate trade in the same, through legitimate intermediaries
may aspire for protection under Article 19 (i)(g) .28

26
Notification - P-12011/12/2022-ES Cell-DOR.

27
Hitesh Bhatia v Mr. Kumar Vivekanand , Case No. 3207/2020.

28
Aditya Mehta and Tanya Singh, “Delhi Court attempts to decode the cryptic case of cryptocurrencies in India”
(Cyril Amarchand Mangaldas, 19 August 2021) <https://corporate.cyrilamarchandblogs.com/2021/08/delhi-
court-attempts-to-decode-the-cryptic-case-of-cryptocurrencies-in-india/> accessed 10 October 2023.

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