INDIA’S FRAMEWORK FOR CRYPTO TAX STILL NEEDS WORK

News: The recent decision to tax Cryptocurrency by 30% has received mixed reactions. A more robust regulatory framework is needed.

Has India legitimized Cryptocurrency?

No. Tax law, by nature, cannot legitimise transactions or commodities. The understanding that India has proposed a tax on cryptocurrency and hence legitimized it, is, therefore, flawed.

How Virtual Digital Assets (VDAs) have been defined and issues with the definition?

– Read here

Exception: Indian and foreign currencies have been excluded from the definition of VDAs.

Issues:

– Debit card or credit card holders earn reward points generated through electronic means. Generally, not taxable, but by virtue of the broad definition of VDAs, experts think that they may be taxed.

– As per the Govt, any income from the transfer of any VDA shall be taxed at 30%. But it is unlcear whether the ‘transfer’ would include coin rewards for mining and staking. A mining reward, sometimes in the form of coins is paid to the miners. The coins are not paid by an entity but are won on the network. Therefore, there is no transfer or transferor per se.

Is Bitcoin a foreign currency?

Since Bitcoin was adopted by El Salvador as a legal tender (currency) there was some confusion whether definition of VDAs would include Bitcoin or not.

But, even if Bitcoin is adopted as a currency in foreign countries, it still will come under the purview of a VDA because any instrument must be a currency first and then only can it be foreign currency.

What is the policy approach wrt NFTs and the associated issues?

Only NFTs specifically notified by the government will be covered by VDAs. This approach seems quite tedious because every NFT will have to be notified first and can only then can it be taxed.

The second approach, wherein characteristics will be laid out for NFTs in the notification, seems much more apt. Until a notification spelling out these characteristics are not laid out, they cannot be taxed at 30%.

What is the way forward?

To have a more robust taxation framework for cryptocurrencies, the government must:

– Clarify that cryptocurrencies whether recognised as legal tender in other jurisdictions or not will be covered by the definition of VDAs

– Clarify whether mining rewards in the form of coins are taxable under section 115BBH

– Notify preferably, the characteristics of NFTs that will be covered under the definition of VDAs

– Introduce the framework for taxing cryptocurrencies under goods and services tax law to offer tax certainty.

Source: This post is based on the article “INDIA’S FRAMEWORK FOR CRYPTO TAX STILL NEEDS WORK” published in Live mint on 9^th Feb 2022.