Crypto Currencies

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    • The Lok Sabha approved the Finance Bill, 2022. The approval completes the budgetary process for the next financial year. It has proposed to levy a flat 30% tax on capital gains from crypto currencies/assets, non-fungible tokens (NFT) etc. with effect from April 1, 2022.

    What is a Cryptocurrency?

    • It is a digital currency that can be used in place of conventional money.
    • In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
    • It is supported by a decentralized peer-to-peer network called the blockchain.
    • First cryptocurrency: Bitcoin, launched in 2009 by Satoshi Nakamoto.

    Data on Tax

    • India was probably the only country that did not resort to new taxes whereas as many as 32 countries have increased the tax rates after the pandemic as per an OECD report.

     

    Key amendments/changes made

    • Definition for crypto assets
      • The government in the Union Budget for 2022-23 has for the first time provided definition for crypto assets and set out a list of proposals on the taxation of this new asset class.
    • Coverage
      • The tax proposal covered all emerging digital assets, including non-fungible tokens (NFTs), assets in metaverse, digital currencies and tokens, among others.
    • Tax deducted at source
      • The Budget also said a 1% TDS (tax deducted at source) will be applicable on payments made on the transfer of digital assets.
    • Loss from the transfer of virtual digital assets
      • It will not be allowed to be set off against the income arising from the transfer of another VDA in the proposed amendments.
    • 30 per cent tax on income
      • The government will define virtual digital assets with a view to levy 30 per cent tax on income from all transfers of such assets.
      • Section 115BBH was introduced in the Finance Bill, 2022 to inter alia tax transfer of VDAs.
    • Capital assets
      • The amendment now seeks to clear the ambiguity by inserting a sub-section which applied the 2(47) definition to transfer of VDAs irrespective of whether they are construed as capital assets or not.
    • Infrastructure cost
      • Incurred in the mining of virtual digital assets including cryptocurrencies will not be allowed as deduction by the taxman.
    • Penalty
      • Deduction of surcharge and cess, which has been claimed and allowed to the taxpayer, will be deemed to be under-reported income and will attract a 50 percent penalty.
      • They can voluntarily declare such classification and avoid the penalty.
    • Retrospective amendment to the Income-tax Act from 2005-06
      • The Finance Bill 2022 had proposed a retrospective disallowance of deduction for surcharge or cess under Section 40(a) (ii) with effect from AY2005-06.
      • Citing some court rulings that had given benefit to taxpayers in claiming cess as expenditure and not tax, the tax department said the retrospective amendment is being done to correct the anomaly.

    Some issues with the amendments

    • Double taxation: The proposed amendment on taxation of VDS could possibly lead to transactions in VDA being subject to TDS or TCS under provisions other than Section 194S and Section 194-O, thereby leading to double taxation.
    • Some tax experts opine that it may be possible to set off crypto losses against crypto gains.
      • Set off of losses means adjusting the losses against the profit or income of that particular year. This provision is available in stock investments.
    • The meaning of the phrase “transfer” was unclear as the definition of the term provided under Section 2(47) applied only in relation to capital assets.

    Benefits of Cryptocurrency

    • Inherent security:  Use of pseudonyms and ledger systems conceals the identities.
    • Low transaction cost: Very low fees and charges for transactions.
    • Lack of interference from the banking system: Outside ambit of banking systems.
    • Lower Entry Barriers: No entry barriers, unlike conventional banking systems.
    • Universal recognition: Lots of cryptocurrencies and acceptable in many nations.

    Concerns/Challenges with Cryptocurrency

    • Security risks: Cyberattacks on wallets, exchange mechanism (Cryptojacking). 
    • Shield to Crime: Used for Illicit Trading, Criminal Activities, & organized crimes. 
    • Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand of the latter will fall.
    • Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
    • Price Volatility:  Prone to price fluctuations & waste of computing power.
    • Lack of Consumer Protection: No Dispute Settlement Mechanisms and control of Securities and Exchange Board of India (SEBI). 

    Source: IE

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