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Why crypto players are confused about new tax rules

It has been made clear that RBI will issue Central Bank Digital Currency

finance-ministry-cryptocurrency-bill-bitcoin Representative image | File, Finance Ministry

Even since the crypto tax proposal was made by Finance Minister Nirmala Sitharaman during her budget speech, mixed reactions are emanating from the crypto platforms and the community. Though the fact that the finance minister has proposed a tax on crypto or virtual digital assets has ended uncertainty around crypto as people see this as the first step to regulations and a certainty that it will not be banned in the country, at the same time, it has added to the confusion. For many crypto players, the proposed taxation rate of 30 per cent tax on the profits and not being able to offset their losses will discourage people from investing in crypto currencies in the country and would discourage crypto transactions. Besides, there are also multiple aspects mentioned in the proposal for which the crypto community is looking for answers.

“The proposed taxes are very steep and this has led to disappointment among the crypto community and is very steep for the low income or middle-income crypto traders. The crypto community in India is towards taxation and regulation but with terms that are fair towards consumers and crypto platforms. Otherwise, crypto traders would prefer foreign platforms for their transactions and the Indian crypto ecosystem will head towards a doom,” remarked Bhagaban Behera, CEO and Co-Founder of Defy.

Experts feel that there are many aspects where a lot more clarity regarding taxation is required from the government. “Regarding crypto transactions carried out till 31st March 2022 if there is a loss on trading of Virtual Trading Assets (VDA) crypto, whether such loss can be set off against other income or carried forward to be set off against other income of the VDA trader. On plain reading of the proposed section, it should be possible to set off loss on trading of VDA against other business income, if VDA constitutes business of the VDA trader and against short-term or long-term capital loss, if the VDA were capital asset of the taxpayer,” explained Gopal Bohra, Partner, NA Shah Associates.

He pointed out that as per the budget proposal, the person responsible for making payment to a resident towards consideration for transfer of the VDA is required to deduct TDS at 1 per cent and there is no clarity whether the buyer of the VDA is required to deduct TDS or the exchange which is facilitating the transaction will deduct such TDS. “In case the buyer of the VDA is required to deduct TDS, it would be nearly impossible for him to comply with the requirement as he will never know who the seller is and in that event tax department may disallow the cost of acquisition of VDA due to non-deduction of TDS under section 40(a)(ia). Additionally, the government should also clarify under which head income from transfer of VDA will be reported whether under business income, capital gain or other sources as presently the same is not clear,” added Bohra.

Experts point out that the new proposed 1 per cent transaction tax and 30 per cent profit and gains Income Tax on Digital Assets need more clarification. “Clarification is required specifically on origination of transaction, settlement jurisdiction, double taxation avoidance rules and treaties, investor protection norms, fraud detection, digital asset theft and overall GRC governance, risk and compliance and a clear view is also required on the intent of the Regulator and Authorities,” Sudin Baraokar Global IT and Innovation Advisor told THE WEEK.

He further pointed out that it has been made clear that the Reserve Bank of India will issue CBDC (Central Bank Digital Currency) and this approach will be useful for the central bank to use the Blockchain Innovations across both Retail CBDC and Corporate CBDC. “Once these rules are made clear then it will pave the way for a regulated Digital Asset issued by a Central Bank versus a Bitcoin or cryptocurrency issued by various unregulated entities and networks. The main focus should be on the protection of investor and citizen money to help ensure that fraud and theft can be minimised or completely eliminated,” added Baraokar.

Tax experts point out that the budget is treating crypto income the similar way it treats income from gambling, horse racing, lotteries, crossword and competitions like KBC. There too, the income is taxed at a flat rate of 30 per cent without any deduction of expenses and without set off against other income.

“What is a 'transfer' in the context of VDAs? Even though the income tax act clearly defines what is transferred in the context of capital assets. The same cannot be applied to VDAs. So, it remains to be clarified what a 'transfer' of VDA entails? This is important due to how cryptocurrencies are transacted in the real world - there are events like airdrops, forking, staking, P2P lending, wallet transfers (which may happen across international borders). Also, investors can purchase goods and services via cryptos, whether this will qualify as transfer and what value should be attributed (FMV) for defining the value which shall be used for deduction of TDS,” remarked Archit Gupta, Founder and CEO - Clear (formerly ClearTax).

He said that a lot of clarity is required on whom will be the onus of deducting TDS. As the law has laid down the onus of deducting TDS on the one who transfers the consideration. “Now since a direct transfer may not happen, it can happen through an exchange therefore more clarity is required whether the buyer must do TDS or the exchange. Deducting and depositing TDS may require the buyer to obtain TAN and individuals carry out hundreds of daily transactions where TDS compliance may run into thousands or items in a week or month's time. Also, the way tax on crypto income has been defined, investors will not be able to claim the benefit of minimum exemption limit against crypto income. Therefore, if an investor only has crypto income (and no other income) of Rs 5 lakh, 30 per cent of it will have to be paid as tax (no deductions are allowed therefore no 80C shall be allowed as well),” Gupta said.

Many experts also state that taxable events need a definition. Is a tax event triggered when a crypto is converted to Indian National Rupee (INR) or only when it is brought to the bank account? Do taxes need to be calculated when a crypto is converted to another crypto without using INR?

“Implications on some aspects of the crypto ecosystem such as staking rewards, mining rewards, and crypto airdrops need to be ascertained. In some countries only when an investor claims the rewards, it becomes taxable though it may already be in his account. Also, the 1 per cent TDS proposal needs a thorough implementation plan. If the seller is responsible for deducting and declaring TDS against a PAN card, how will he or she do this conveniently? What is the role of exchanges in the above? Is the TDS applicable for peer-to-peer transactions outside of exchanges? And what happens on foreign exchanges where sellers can be foreign? Given the limited timeframe before the regime comes into effect (April 1, 2022), all business and investors hope the government answers all the above soon leaving no room for individual interpretation,” said Vikram Subburaj, co-founder and CEO of Giottus Cryptocurrency Exchange.

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