Virtual Digital Asset: An Intangible Credit with Tax Liability

With the rising interest of individuals towards investment in digital assets like non-fungible tokens and bitcoin, the government has brought the digital asset transactions into the Indian tax regime in the Union Budget 2022-23. As per the provision, all the income incurred through any type of transfer involving digital assets will attract a 30% tax liability in the Indian taxation system. The provision will be equally applicable for the gifting of digital assets and create the tax liability at the recipient’s end.

These transactions will also incur 1% TDS at the time of execution and help in tracking these investments and transfers. Thus, will bring the gains received from the trading of cryptocurrencies under the regulation of the Indian Government and Reserve Bank of India (RBI) that were out of their ambit before this budget.

The provision somehow legalized the trading of digital currency in India and opened the avenues for the introduction of India’s digital currency. The finance minister has announced the introduction of “Digital Rupee”, an Indian Central Bank Digital Currency (CBDC) using the blockchain and related technology from the fiscal year 2022-23 itself under the regulating guidelines of the Reserve Bank of India.

The Finance Bill, 2022 defines the “Virtual Digital Assets” as the information or code or number or token generated through cryptographic algorithms or a non-fungible token (Specify by Central Government through Gazetted Notification), etc. The government has also notified that the loss incurred in any of such transactions involving Digital Virtual Assets cannot be adjusted to any other income and keep the tax regime intact for any such losses. All of this may attract more trade into these Virtual Digital Assets and pave the way for an efficient and cost-effective digital currency management system in the country.

Looking at the national security, and financial stability of the country the introduction of India’s digital currency is the need of the hour. At the same time bringing it into the high tax net will discourage the transactions and investments in cryptocurrency by Indians in the global market for now and adopt a balanced approach in terms of regulatory and legal compliance within the country.