Budget 2022: New Scheme for Taxation of Virtual Digital Assets

The Budget 2022 marks an important milestone for the blockchain ecosystem in India with the Finance Minister announcing the launch of India’s official digital currency (digital rupee) which will be issued by the Reserve Bank of India starting 2022-23. Considering the phenomenal increase in the volume of the transactions in the virtual digital assets (VDAs) space, the Finance Bill, 2022 (Bill) proposes a new and separate scheme for taxation of VDAs (although the legality of the same is still unclear). The key highlights of this development are discussed below.

Definition of ‘virtual digital asset’

The Bill proposes to define VDAs to mean, (i) any information, code, number, or token (not being an Indian or a foreign currency) which is generated through cryptographic means or otherwise and which can be transferred, stored, or traded electronically, (ii) non-fungible tokens; or (iii) other to be notified digital assets. The definition seems to have been kept broad to cover new assets emerging in this space and is proposed to come into effect from 1 April 2022.

Computation of income arising from the transfer of VDAs and tax rate

The Bill proposes to tax the income arising to any taxpayer from the transfer of any virtual digital asset at a flat rate of 30% (plus applicable surcharge and health and education cess). While computing the income arising from such transfer, no deduction for any expenditure or loss will be allowed to the taxpayer except the cost incurred in acquiring the VDAs. Further, the taxpayer will not be entitled to set-off or carry forward any loss arising on transfer of VDAs.

The amendment, proposed to be effective from 1 April 2022, is likely to bring much needed clarity regarding the taxability of VDAs going forward. However, since the provisions are proposed to be applicable prospectively, several questions may remain unanswered regarding the tax positions adopted by the taxpayers in the preceding years.

Gift of VDAs made taxable in the hands of recipient

The Bill proposes to make the receipt of VDAs as a gift (i.e. for nil or inadequate consideration) taxable in the hands of the recipient taxpayer as income from other sources, with effect from 1 April 2022. However, the Bill does not provide any guidance on the valuation norms for computing such income in the hands of recipient.

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