Cryptocurrency tax: Budget 2022 unveils norms for virtual digital assets

Is India anti-crypto? Is crypto a taboo? Will the government allow tax officials and investigating agencies to determine the framework for regulating and taxing cryptocurrencies? Such questions were being posed in recent media coverage with the government being accused of inaction, besides businesses asking for a direction. The finance minister seems to have taken them in her stride to unveil constructively the framework for taxing the crypto economy. The fineprint and tax incidence aside, this move is laudable because it gives a formal shape and a reflection of a conscious evolution of India’s tax policy, unlike the knee-jerk reactions and over-ruling of judicial determination, which has often been the trait of tax policy evolution in the past.

In a policy perspective, the move is to be appreciated. The manner in which the expression “virtual digital asset” has been defined in tax laws is clearly a reflection that the framework unveiled is not a limited one and is, instead, set in terms so as to encapsulate even future advancements and evolution of technology in the regulatory crypto space. For a start, all crypto assets (technically defined as information/code/token providing a digital representation of value exchanged or functioning as storage of value or unit of account, etc) are covered. In addition, non-fungible tokens and similar ones have been specifically covered. To provide legroom to the government to deal with evolving situations, particularly given the cross-border nature of this class of asset, the government has been empowered to notify other forms of digital assets within this framework including the exclusion of those assets not considered suitable for coverage leaving room for regulatory evolution.

Crypto assets have been carved out under the framework of capital gains, a default rule for taxing all assets and a new scheme preventing taxpayers to characterise them as business income or take set-off of losses from crypto against other classes of assets. Under the new scheme, income tax will be payable on profits from transferring a crypto asset (with the cost of acquisition being the only allowance) at the highest tax rate of 30 per cent plus applicable surcharges. In short, the exchequer will share at least one-third of the value addition made by a person in the transfer of crypto assets. No carry-forward of losses is allowed, nor are other deductions available qua other assets, which more or less brings the crypto economy at par with speculative businesses. In addition, a special provision will govern tax deduction, perhaps intended towards monitoring the flow of funds and ensuring taxpayer compliance.

The move, though limited to income tax, has sent the ball rolling for a regulatory framework of crypto assets. It should be read in the light of two other announcements —one relating to the unveiling of the digital rupee, which shows that the crypto is to be de-hyphenated from crypto assets; the second, to increase its usage in areas often outside the digital coverage, such as the digitisation of land records and health records of citizens. No doubt, the fine-tuning of crypto regulation will have to be made in the light of imminent privacy laws and data localisation regulations, including balancing on the touchstone of fundamental rights of citizens. However, the fact that it is the tax policy that has taken the first leap clearly shows that it will be the tax law in India which will shape the regulation of crypto assets, even though taxability of income is agnostic to legality of income. Another relevant aspect is that the Budget does not address the GST treatment of crypto assets, though this could well fall in the framework of the GST Council. Given that the finance minister is chairperson of the Council, it is not a far cry to expect a similar unveiling of an indirect tax scheme for taxing crypto assets. The Budget 2022 has picturised the landscape expected by the crypto economy stakeholders. Further clarification is expected to follow from the tax boards and the Reserve Bank of India to fill in the ground level details vis-a-vis the tax and regulatory aspects of this economy. The year 2022 will clearly be the year in which the crypto economy is formalised.

The writer is managing partner, BMR Legal Advocates. Divyasha Mathur contributed to this column. Views are personal.