The emergence of virtual digital assets (such as cryptocurrencies, non-fungible tokens etc.) in recent times and its unprecedented popularity amongst masses has led to substantial volumes of trading in such virtual space. This has also posed challenges of taxation of income arising on trading in such digital assets as the existing tax framework, may arguably, have lacked the requisite legislative machinery to tax such income.
The Government has been mulling over introducing mechanism to tax such digital assets, which, now seem to have come to fruition, in the Finance Bill 2022(“Finance Bill”). The Finance Bill has proposed to introduce a slew of new provisions in the Income-tax Act, 1961 (“Income Tax Act”) to provide for a detailed framework for taxation of income on sale and purchase of virtual digital assets (“VDA”), including tax withholding and gift of such VDA, which are being discussed in this article.
A new clause (47A) is proposed to be introduced in section 2 of the Income Tax Act to define ‘virtual digital asset’ to mean the following:
A new section 115BBH is proposed to be inserted to provide for taxation of income arising on transfer of VDA. Similarly, gift of VDAis also proposed to be taxable, going forward, in the hands of the recipient or transferee and consequential changes are proposed in the provisions of section 56(2)(x) of the Income Tax Act. Salient features of the proposed taxation regime are as under:
With the requisite legislative framework in place, the stage is now set to tax the income arising on transfer of VDA, which has long been a subject to intense debate and is likely to bring in significant revenues for the exchequer. There is enough flexibility for government to notify or de-notify VDA from the scope of this new regime, which means that more and more VDA may come within the ambit of the proposed tax.
This article was originally published in The Economic Times on 2 February 2022 Co-written by: Gouri Puri, Partner; Rahul Yadav, Principal Associate. Click here for original article
Contributed by: Gouri Puri, Partner; Rahul Yadav, Principal Associate
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