Budget 2022: Crypto Assets are Being Taxed but Like Cocaine They are Not Yet Legal
K Yatish Rajawat
Finance Minister Nirmala Sitharaman has announced that earnings from virtual digital assets will be taxed at 30 per cent; any capital losses on such assets cannot be settled against other capital gains.
Virtual digital asset is the official nomenclature that will be used from now on for crypto assets, or any other digital tokens like non-fungible tokens (NFT). I have said several times that these digital tokens need to be controlled, the so-called exchanges selling them need to be monitored and regulated. In the Wild West World of these assets, there are no rules and players brazenly advertise and even promise gains. And, they even “advice” that the RBI needs to issue CBDCs (Central Bank Digital Currency) or Digital Rupee.
These exchanges keep changing the location of their permanent establishment to avoid scrutiny and taxation. While all the time acting as holier-than-the-world and saying they want to be regulated, globally. Yes, they seek “global regulations” for the local mischief they are doing. They want the governments of the whole world to come together before acting towards controlling these exchanges or forcing them to meet a nation’s regulatory requirement.
It is like a pharmaceutical company selling opioids and saying we won’t be classified as a narcotic-class addictive drug by any country till such time ALL the countries do not classify opioids as such.
The FM in her budget speech reiterated most of my suggestions.
But now that the government has decided to tax these tokens, founders of the so-called crypto exchanges are again going to the market, falsely claiming their tokens have been recognised, legitimised. The founders and CEOs of these exchanges have been issuing misleading communication, fooling investors about these assets.
Let me give another analogy to make it clear. Can a cocaine seller who pays tax on his earning from selling a banned product like cocaine claim legitimacy for cocaine? Can he claim legitimacy because he is paying taxes on his earnings? His earnings are being recognised, not the product he is selling. He is still liable for action and arrest under the IPC code for selling narcotics. While a lot of investors may call this analogy with cocaine or opiates wrong, but it is important to note the similarities.
As a matter of fact, when Al Capone, the Chicago Mafia head, was arrested in 1931 for tax evasion, his defence was, “They can’t collect legal taxes from illegal money.” He was arrested and sent to jail for 11 years for tax evasion. This is because earnings from illicit trade are also subject to taxation.
Even opiate makers managed to fool the US FDA for a long time by refusing to be classified as narcotics addictive drugs. They kept talking about the ability of their drugs to ease pain for their users, hence demanding exemption from narcotic classification. Similar to crypto exchanges, who keep talking about blockchain, decentralised finance and lately Web 3.0 and its ability to ease transaction costs and reliability. All this ability, they argue, is in the interest of greater good, rather only for the public good. This is a fast one and they are succeeding in pulling this farce as they are buying out media and influencers to promote it.
The new definition will even cover non fungible tokens (NFTs) as they are also digital assets. Several people have got on to the bandwagon of NFTs, using it to convert black money into white.
The process is very simple, an NFT is created around some meaningless item, and sold to a compromised buyer for an enormous amount of money. As of now such token transactions were not taxed, and it was the easiest way to convert your income from black to white. Even store it in the form of crypto assets outside the country through dubious exchanges.
This is similar to ‘Art scam’ practised by a section of the bureaucracy in the ‘90s. A bureaucrats’ wife would make and sell a painting for an unheard of price to a buyer who’s seeking favours from the officer. Nobody could object to the transaction or the value as it was considered art whose value was indeterminate. This is what is happening in the NFT space too, a digital asset with uncertain value is being sold at a huge price, nobody knows whether the value is real or fictional. Once the transaction is taxed, the tax paid will be in real currency, forcing the real value to be revealed.
Which is why the proposal to impose a TDS on digital tokens’ transactions will help the Income Tax department identify the buyer and seller. And the market places which are conducting these transactions will be responsible for ensuring that this TDS is collected and paid. This would ensure that the uncertain tax status of these exchanges and their earnings would also come under the ambit of the taxman.
The central bank digital currency or the Digital Rupee will ensure that global wholesale transaction costs come down. One of the first adopters of the Digital Rupee should be exporters, importers and e-commerce companies. This will help them carry out their transactions faster with customers globally, reducing the cost of transactions.
If the RBI makes it mandatory that Digital Rupee has to be used for all foreign transactions, the money laundering currently happening through foreign banks will also stop. There is another very important and significant shift that may happen if these transactions become mandatory, which is the need for localisation. RBI may not go heavy on localisation of data if compulsory CBDCs become a success in the system. These are early days, but there is more to come in this space.
The author is CEO, Center for Innovation in Public Policy. The views expressed in this article are those of the author and do not represent the stand of this publication.
K Yatish Rajawat
Finance Minister Nirmala Sitharaman has announced that earnings from virtual digital assets will be taxed at 30 per cent; any capital losses on such assets cannot be settled against other capital gains.
Virtual digital asset is the official nomenclature that will be used from now on for crypto assets, or any other digital tokens like non-fungible tokens (NFT). I have said several times that these digital tokens need to be controlled, the so-called exchanges selling them need to be monitored and regulated. In the Wild West World of these assets, there are no rules and players brazenly advertise and even promise gains. And, they even “advice” that the RBI needs to issue CBDCs (Central Bank Digital Currency) or Digital Rupee.
These exchanges keep changing the location of their permanent establishment to avoid scrutiny and taxation. While all the time acting as holier-than-the-world and saying they want to be regulated, globally. Yes, they seek “global regulations” for the local mischief they are doing. They want the governments of the whole world to come together before acting towards controlling these exchanges or forcing them to meet a nation’s regulatory requirement.
It is like a pharmaceutical company selling opioids and saying we won’t be classified as a narcotic-class addictive drug by any country till such time ALL the countries do not classify opioids as such.
The FM in her budget speech reiterated most of my suggestions.
But now that the government has decided to tax these tokens, founders of the so-called crypto exchanges are again going to the market, falsely claiming their tokens have been recognised, legitimised. The founders and CEOs of these exchanges have been issuing misleading communication, fooling investors about these assets.
Let me give another analogy to make it clear. Can a cocaine seller who pays tax on his earning from selling a banned product like cocaine claim legitimacy for cocaine? Can he claim legitimacy because he is paying taxes on his earnings? His earnings are being recognised, not the product he is selling. He is still liable for action and arrest under the IPC code for selling narcotics. While a lot of investors may call this analogy with cocaine or opiates wrong, but it is important to note the similarities.
As a matter of fact, when Al Capone, the Chicago Mafia head, was arrested in 1931 for tax evasion, his defence was, “They can’t collect legal taxes from illegal money.” He was arrested and sent to jail for 11 years for tax evasion. This is because earnings from illicit trade are also subject to taxation.
Even opiate makers managed to fool the US FDA for a long time by refusing to be classified as narcotics addictive drugs. They kept talking about the ability of their drugs to ease pain for their users, hence demanding exemption from narcotic classification. Similar to crypto exchanges, who keep talking about blockchain, decentralised finance and lately Web 3.0 and its ability to ease transaction costs and reliability. All this ability, they argue, is in the interest of greater good, rather only for the public good. This is a fast one and they are succeeding in pulling this farce as they are buying out media and influencers to promote it.
The new definition will even cover non fungible tokens (NFTs) as they are also digital assets. Several people have got on to the bandwagon of NFTs, using it to convert black money into white.
The process is very simple, an NFT is created around some meaningless item, and sold to a compromised buyer for an enormous amount of money. As of now such token transactions were not taxed, and it was the easiest way to convert your income from black to white. Even store it in the form of crypto assets outside the country through dubious exchanges.
This is similar to ‘Art scam’ practised by a section of the bureaucracy in the ‘90s. A bureaucrats’ wife would make and sell a painting for an unheard of price to a buyer who’s seeking favours from the officer. Nobody could object to the transaction or the value as it was considered art whose value was indeterminate. This is what is happening in the NFT space too, a digital asset with uncertain value is being sold at a huge price, nobody knows whether the value is real or fictional. Once the transaction is taxed, the tax paid will be in real currency, forcing the real value to be revealed.
Which is why the proposal to impose a TDS on digital tokens’ transactions will help the Income Tax department identify the buyer and seller. And the market places which are conducting these transactions will be responsible for ensuring that this TDS is collected and paid. This would ensure that the uncertain tax status of these exchanges and their earnings would also come under the ambit of the taxman.
The central bank digital currency or the Digital Rupee will ensure that global wholesale transaction costs come down. One of the first adopters of the Digital Rupee should be exporters, importers and e-commerce companies. This will help them carry out their transactions faster with customers globally, reducing the cost of transactions.
If the RBI makes it mandatory that Digital Rupee has to be used for all foreign transactions, the money laundering currently happening through foreign banks will also stop. There is another very important and significant shift that may happen if these transactions become mandatory, which is the need for localisation. RBI may not go heavy on localisation of data if compulsory CBDCs become a success in the system. These are early days, but there is more to come in this space.
The author is CEO, Center for Innovation in Public Policy. The views expressed in this article are those of the author and do not represent the stand of this publication.
Modi government crypto tax aims to maximise state revenue, deter low-income investors
The Budget gave a crypto tax scheme to meet several policy goals. But here are the loopholes that you're missing.
MEGHNA BAL
2 February, 2022
It’s disincentivising for some
The second principle is to use a high tax rate as a disincentive for individuals with low incomes from investing in VDAs. Income earned from these is taxable at 30 per cent – the same rate at which Short Term Capital Gains above Rs 10 lakhs are taxed.
Third, to deploy a tax-deductible-at-source (TDS) mechanism to understand the extent of activity in the VDA market. The Finance Bill 2022 introduces a Section 194S into the Income Tax Act, 1956, under which the person paying for the VDA must deduct income tax at the rate of 1 per cent from the transaction amount. The TDS is also applicable to transfers of VDAs where there is no cash component, such as a VDA to VDA exchange, or a peer-to-peer transfer. In such cases, the person must ensure that they have paid the tax for such a transaction.
The implementation of Section 194S will be riddled with complexity, particularly in scenarios where there is no fiat currency used for transactions. How will an assessee calculate the tax deductible if the prices for VDAs are not standardised? It is well established that VDA pricing varies from country to country and exchange to exchange. According to a report, on 24 November 2021, Bitcoin was priced at 33.5 lakhs on Wazirx and 41.94 lakhs on Binance. The differences in pricing are a function of several factors, including liquidity and transaction costs. Moreover, in such transfers, the person using non-cash means of consideration is responsible for paying the tax. Thus, in VDA to VDA exchanges, both parties have a tax liability.
The Finance Bill states that if any difficulties arise in the implementation of Section 194S, the Central Board of Direct Taxes (CBDT) will issue guidelines to ameliorate the situation. However, the Section’s complexity points to an intent to discourage unsophisticated investors from interacting with VDAs as well as peer-to-peer transactions and VDA swaps. An unintended consequence of the provision may be that an increasing number of people may resort to using anonymity-centric VDAs that are hard to trace.
Where the loopholes are
Fourth, to carve out exemptions to reduce the enforcement and implementation burden of the tax scheme. Two classes of persons are exempt from the TDS requirement for VDAs — those who pay a total of Rs 10,000 for VDAs in a financial year and a special class known as specified persons. The latter is an individual or a Hindu Undivided Family (HUF) whose total turnover/receipts from business does not exceed Rs one crore (or 50 lakh, in case they are professionals). This category also includes individuals/HUFs who do not have any profits or gains from their business or profession. Specified persons who pay a total of under Rs 50,000 for VDAs in a financial year will be exempt from the TDS requirement under Section 194-S.
Like all exemptions, the carve-outs under Section 194S create a loophole that is likely to be misused. For instance, a person may trade through several individuals who fit the description of specified persons, similar to how benami transactions are conducted in the case of immovable properties. Depending on how the situation evolves, the government may need to supplement this requirement with some provision for the identity of the ultimate beneficiary to check abuse.
Fifth, to make it clear to anyone investing in VDAs that they cannot be relied upon as a tax evasion instrument. Assessees cannot claim any deduction for expenditure, allowance, or set-off on income earned from VDAs other than the cost of acquisition. Moreover, losses incurred on VDA transfers cannot be used to diminish tax liability under other income slabs. Assesses will also not be allowed to carry forward such losses to succeeding assessment years.
The VDA tax scheme aims to ensure that all VDA transfers are taxable, create a mechanism to gather information on all such transactions in the country, discourage those in lower-income brackets from engaging with VDAs, and put up disincentives to VDA swaps and peer-to-peer transactions. While the 30 per cent income tax provision comes into effect on 1 April 2023, the one per cent TDS will be effective from 1 July 2022. The scheme is ambitious in both scope and design and is likely to face some hiccups during implementation.
The Budget gave a crypto tax scheme to meet several policy goals. But here are the loopholes that you're missing.
MEGHNA BAL
2 February, 2022
Finance Minister Nirmala Sitharaman presents Union Budget 2022 | Twitter/ANI
In her 2022 Budget speech delivered on 1 February, Finance Minister Nirmala Sitharaman announced that virtual digital assets, including cryptocurrencies, will be covered by a taxation scheme. Though the scheme is new, the principles that it relies upon and the issues that are likely to arise from its implementation are fairly conventional.
The first principle at play is ensuring that no earnings from virtual digital assets (VDAs) escape the tax net. The new tax scheme attempts to do this by defining VDAs very broadly. The definition is agnostic in form as well as the technological underpinnings of VDAs. Illustratively, VDAs can be “any information, code, number, or token (that is not foreign or domestic fiat currency)” generated through “cryptography or other means and provide a digital representation of value”.
The definition of VDAs also includes assets that are transferred for no monetary consideration. Such transactions include gifts as well as peer-to-peer exchanges of VDA. Such a definition also attempts to extensively cover VDA functionality. It recognises that they can have inherent value, resemble money, and operate as commodities. VDAs that fall beyond the ambit of this expansive definition are also covered because the Narendra Modi government is empowered to notify any digital asset as a VDA.
This definition of VDAs also covers any token, including non-fungible tokens (NFTs). For the uninitiated, NFTs are non-interchangeable pieces of information on a blockchain. Furthermore, the government will now specify the NFTs that qualify as VDAs, which raises some ambiguity about the tax status of the income earned from their transfer. However, it may be the case that the Modi government will release more comprehensive provisions for different classes of NFTs in the coming months.
In her 2022 Budget speech delivered on 1 February, Finance Minister Nirmala Sitharaman announced that virtual digital assets, including cryptocurrencies, will be covered by a taxation scheme. Though the scheme is new, the principles that it relies upon and the issues that are likely to arise from its implementation are fairly conventional.
The first principle at play is ensuring that no earnings from virtual digital assets (VDAs) escape the tax net. The new tax scheme attempts to do this by defining VDAs very broadly. The definition is agnostic in form as well as the technological underpinnings of VDAs. Illustratively, VDAs can be “any information, code, number, or token (that is not foreign or domestic fiat currency)” generated through “cryptography or other means and provide a digital representation of value”.
The definition of VDAs also includes assets that are transferred for no monetary consideration. Such transactions include gifts as well as peer-to-peer exchanges of VDA. Such a definition also attempts to extensively cover VDA functionality. It recognises that they can have inherent value, resemble money, and operate as commodities. VDAs that fall beyond the ambit of this expansive definition are also covered because the Narendra Modi government is empowered to notify any digital asset as a VDA.
This definition of VDAs also covers any token, including non-fungible tokens (NFTs). For the uninitiated, NFTs are non-interchangeable pieces of information on a blockchain. Furthermore, the government will now specify the NFTs that qualify as VDAs, which raises some ambiguity about the tax status of the income earned from their transfer. However, it may be the case that the Modi government will release more comprehensive provisions for different classes of NFTs in the coming months.
It’s disincentivising for some
The second principle is to use a high tax rate as a disincentive for individuals with low incomes from investing in VDAs. Income earned from these is taxable at 30 per cent – the same rate at which Short Term Capital Gains above Rs 10 lakhs are taxed.
Third, to deploy a tax-deductible-at-source (TDS) mechanism to understand the extent of activity in the VDA market. The Finance Bill 2022 introduces a Section 194S into the Income Tax Act, 1956, under which the person paying for the VDA must deduct income tax at the rate of 1 per cent from the transaction amount. The TDS is also applicable to transfers of VDAs where there is no cash component, such as a VDA to VDA exchange, or a peer-to-peer transfer. In such cases, the person must ensure that they have paid the tax for such a transaction.
The implementation of Section 194S will be riddled with complexity, particularly in scenarios where there is no fiat currency used for transactions. How will an assessee calculate the tax deductible if the prices for VDAs are not standardised? It is well established that VDA pricing varies from country to country and exchange to exchange. According to a report, on 24 November 2021, Bitcoin was priced at 33.5 lakhs on Wazirx and 41.94 lakhs on Binance. The differences in pricing are a function of several factors, including liquidity and transaction costs. Moreover, in such transfers, the person using non-cash means of consideration is responsible for paying the tax. Thus, in VDA to VDA exchanges, both parties have a tax liability.
The Finance Bill states that if any difficulties arise in the implementation of Section 194S, the Central Board of Direct Taxes (CBDT) will issue guidelines to ameliorate the situation. However, the Section’s complexity points to an intent to discourage unsophisticated investors from interacting with VDAs as well as peer-to-peer transactions and VDA swaps. An unintended consequence of the provision may be that an increasing number of people may resort to using anonymity-centric VDAs that are hard to trace.
Where the loopholes are
Fourth, to carve out exemptions to reduce the enforcement and implementation burden of the tax scheme. Two classes of persons are exempt from the TDS requirement for VDAs — those who pay a total of Rs 10,000 for VDAs in a financial year and a special class known as specified persons. The latter is an individual or a Hindu Undivided Family (HUF) whose total turnover/receipts from business does not exceed Rs one crore (or 50 lakh, in case they are professionals). This category also includes individuals/HUFs who do not have any profits or gains from their business or profession. Specified persons who pay a total of under Rs 50,000 for VDAs in a financial year will be exempt from the TDS requirement under Section 194-S.
Like all exemptions, the carve-outs under Section 194S create a loophole that is likely to be misused. For instance, a person may trade through several individuals who fit the description of specified persons, similar to how benami transactions are conducted in the case of immovable properties. Depending on how the situation evolves, the government may need to supplement this requirement with some provision for the identity of the ultimate beneficiary to check abuse.
Fifth, to make it clear to anyone investing in VDAs that they cannot be relied upon as a tax evasion instrument. Assessees cannot claim any deduction for expenditure, allowance, or set-off on income earned from VDAs other than the cost of acquisition. Moreover, losses incurred on VDA transfers cannot be used to diminish tax liability under other income slabs. Assesses will also not be allowed to carry forward such losses to succeeding assessment years.
The VDA tax scheme aims to ensure that all VDA transfers are taxable, create a mechanism to gather information on all such transactions in the country, discourage those in lower-income brackets from engaging with VDAs, and put up disincentives to VDA swaps and peer-to-peer transactions. While the 30 per cent income tax provision comes into effect on 1 April 2023, the one per cent TDS will be effective from 1 July 2022. The scheme is ambitious in both scope and design and is likely to face some hiccups during implementation.
Why tax when India is still debating legality?
On the tax scheme’s position about the legality of VDA transfers in India, the commentary is mixed. Those who say it does nothing to clarify the legality of VDAs cite the fact that proceeds from illegal activity are also taxable. However, even illegal activity is not recognised under the tax law. The Income Tax Act does not specify a tax rate for smuggling or extortion, though income earned from these activities is taxable.
Conversely, the Finance Bill creates a specific tax rate for VDAs, which indicates that the government may allow this activity in the long run. This position is also somewhat affirmed by a recent statement made by the Principal Economic Advisor, Sanjeev Sanyal, who suggested that the government was looking to take a balanced view on cryptocurrencies. The extent of what will be permitted and what will not shall be introduced in legislation specific to cryptocurrencies. On the linkage between privately-issued cryptocurrencies and Central Bank Digital Currencies — these are distinct constructs and commentators would do well to refrain from conflating them.
Meghna Bal is a Fellow at the Esya Centre and a consultant for Koan Advisory, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector.
On the tax scheme’s position about the legality of VDA transfers in India, the commentary is mixed. Those who say it does nothing to clarify the legality of VDAs cite the fact that proceeds from illegal activity are also taxable. However, even illegal activity is not recognised under the tax law. The Income Tax Act does not specify a tax rate for smuggling or extortion, though income earned from these activities is taxable.
Conversely, the Finance Bill creates a specific tax rate for VDAs, which indicates that the government may allow this activity in the long run. This position is also somewhat affirmed by a recent statement made by the Principal Economic Advisor, Sanjeev Sanyal, who suggested that the government was looking to take a balanced view on cryptocurrencies. The extent of what will be permitted and what will not shall be introduced in legislation specific to cryptocurrencies. On the linkage between privately-issued cryptocurrencies and Central Bank Digital Currencies — these are distinct constructs and commentators would do well to refrain from conflating them.
Meghna Bal is a Fellow at the Esya Centre and a consultant for Koan Advisory, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector.
Read all the articles here.
(Edited by Humra Laeeq)
(Edited by Humra Laeeq)
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