HOW IS VIRTUAL DIGITAL ASSETS ARE TAXED?
What is the Meaning of Virtual Digital Asset?
Finance Bill 2022, has introduced to insert a new clause (47A) to section 2 of Income Tax Act, 1961 which defines the meaning of Virtual Digital Asset. According to this section 2(47A), Virtual Digital Asset means:
a. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
b. any other digital asset, as the central government may, by notification in the official gazette specify; Provided that the central government may, by notification in the official gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
c. any other digital asset, as the central government may, by notification in the official gazette specify:
Let us understand how Virtual Digital Asset are taxable under section 115BBH:
Finance Bill 2022, proposed section 115BBH. Under this this section, the income from transfer of any virtual digital asset shall be taxable at the rate of thirty percent.
No deduction in respect of any expenditure except cost of acquisition shall be allowed while calculating tax under section 115BBH. Hence the word cost of acquisition has been used in union budget 2022 so no indexation would be allowed in case virtual digital asset is held by assessee more than thirty six month.
No set off of any loss from transfer of the digital virtual asset shall be allowed against income computed under any other provision of the act.
No loss on account of digital virtual asset shall be carried forward to succeeding assessment years.
Taxability under section 56(2)(X)
As per the explanation given in section 56(2)(x) says that for the purposes of this clause, the expressions “assessable”, “fair market value”, “jewellery”, “property”, “relative” and “stamp duty value” shall have the same meaning assigned to them in the explanation to clause (vii).
In Finance Bill 2022, an amendment has also been proposed in section 56(2)(x). Now as per finance bill 2022 this explanation will be read as For the purposes of this clause, the expressions “assessable”, “fair market value”, “jewellery”, “relative” and “stamp duty value” shall have the same meaning assigned to them in the explanation to clause (vii); and
The expression “Property” shall have the same meaning as assigned to it in clause (d) of the explanation to clause (vii) and shall include virtual digital asset.
In case virtual digital asset is transferred to a person without any consideration then section 56(2)(x) shall be triggered and the recipient of such virtual digital asset shall now be liable to pay tax on the fair market value in case the fair market value of such asset exceeds fifty thousand rupees.
In case virtual digital asset is transferred to a person for a consideration and the consideration is less than the fair market value and the difference between consideration and the fair market value is more than fifty thousand rupees then such difference will also be taxable in the hand of recipient of such asset.
In both the above cases, virtual digital asset will be taxable under the head income from other sources and the same will not be taxed under section 115BBH. It will be taxable under rate of tax applicable to such person.
Tax Deduction at Source under section 194S:
A new section 194S has been proposed in Finance Bill 2022. As per section 194S, any person responsible for paying to a resident, any sum of money by way of consideration for transfer of virtual digital asset, shall deduct tds at the rate of one percent.
Tds shall be deducted at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier.
In case the consideration for transfer of virtual digital asset is paid in kind or partly in cash or partly in kind, then person responsible to pay the consideration shall ensure before releasing the consideration that tax has been paid in respect of such consideration for transfer of virtual digital asset.
No tax shall be deducted where the consideration is payable by specified person to a resident and the value or aggregate of such consideration does not exceed fifty thousand rupees during the financial year.
In case consideration is payable by a person other than specified person, then no tax shall be deducted where consideration value does not exceed ten thousand rupees during the financial year.
Here specified person means a person being an individual or HUF, whose total sales, receipts or turnover form the business does not exceed one crore rupees and in case of profession it does not exceed fifty lakh rupees during the financial year immediately preceding the financial year in which such virtual digital asset is transferred.
In case the consideration towards transfer of virtual digital asset is payable by specified person then section 203A does not apply and there is no need to have Tax deduction account number. PAN will be used by deductor for the purpose of section 194S.
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