CA Chintan Vajani

  1. Introduction
    1. Technology has become disruptor in every sector including Financial Sector. Blockchain is one of several emerging technologies alongside artificial intelligence, the internet of things and 5G mobile networks., which are expected to drive new levels of digital transformation and disruption in the years ahead. Crypto assets (popularly known as crypto currency / NFT) has been the most hyped application of blockchain technology which pose a challenge for policymakers in a wide range of areas including tax policy.
    2. Some countries have started to respond to these challenges by issuing guidance on the treatment of crypto assets. However, in most countries, and in the emerging academic literature, there is often a lack of comprehensive guidance or a framework for the treatment of these assets for tax purpose, with any guidance generally being partial or incomplete. This lack of guidance may be driven in part by the complexity of defining the tax treatment for these assets in a way that covers their different facets, as well as their rapidly changing nature.
    3. In India also indecisiveness on regulatory front continued till date except in respect of taxation. Hon’able FM in her Budget 2022 speech mentioned that the magnitude and frequency of transactions

      in virtual digital assets (“VDA”) have made it imperative to provide for a specific tax regime. Accordingly, provisions relating to taxation of VDA were proposed in Finance Bill 2022.

  2. Taxation in India
    1. Prior to amendment made by Finance Act 2022, different tax treatments were accorded to income from VDA. The tax treatment was determined considering the crypto asset as similar to shares and securities and accordingly income from the same was offered to tax either as ‘Profits and gains from business or profession’ or as ‘Capital Gain’ after claiming expenditure allowable under relevant heads. Further, such income was also considered for set off under respective heads and inter-heads adjustment.
    2. The Government has introduced specific provision relating to taxation of VDA through Finance Act 2022 which is effective from 1st April 2023. Section 115BBH has been inserted as charging section for taxing income from transfer of VDA. It also provides for allowance / disallowance / set off of expenditure / loss from such income. Section 2(47A) inserted to define VDA. Expl to Sec 56(2)

      (x) involving VDA requiring deduction of tax at source. Salient features of these provisions have been summarised herein below.

      has been amended to include VDA in the definition of property and section 194S has been inserted to track the transaction

    3. Section 2(47A) of the Act defines VDA in an exhaustive manner. As per the section, VDA means –
      1. 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;
      2. a non-fungible token or any other token of similar nature, by whatever name called;
      3. any other digital asset, as the Central Government may, by notification in official gazette specify
    4. Further, central government is empowered to include / exclude any digital assets to / from the definition of VDA. The government has excluded gift card or vouchers, mileage points, reward points, loyalty points redeemable only to obtain goods or services or discount on goods or services.1
    5. To tax gift of VDA in the hands of recipient, explanation to section 56(2)

      (x) has been amended to include VDA into the definition of Property. Here it is imperative to note that section 56(2)(x) seeks to charge income on the basis of receipt of property without consideration or for an inadequate consideration vis-à- vis fair market value of the property.

    6. Section 115BBH has been inserted as charging section. It also provides for computation mechanism in respect of income from transfer of VDA. The salient feature of this section is as under
      1. 30% tax on income from transfer of VDA
      2. No deduction in respect of any expenditure or loss, except cost of acquisition of that VDA is allowed.
      3. Loss arising from transfer of VDA shall not be allowed to be set off against any other income or gain or gain from other VDA. Further, such loss is not allowed to be carried forward in succeeding year.
      4. For the purpose of this section, the word ‘transfer’ shall have meaning defined in section 2(47) of the Act irrespective of the fact that whether VDA is capital asset or not.
    7. Section 194S has been inserted with effect from 1st July 2022 to provide for deduction of tax from payment on transfer of VDA. The salient feature of the same is as under:
      1. Any person responsible for making payment to resident in connection with transfer of VDA to deduct tax @ 1% of consideration for transfer of VDA.
      2. Tax to be deducted at the time of credit or at the time payment whichever is earlier.
      3. In case of overlapping with Section 194O,2 deduction of tax under section 194S.
      4. CBDT empowered to issue guidelines for the purpose of removing difficulty.
  3. Issues and grey areas
    1. The world over, different approaches were considered for characterisation of crypto assets. While majority of countries refers to them as intangible assets, some considers them as commodities or financial instruments3. However, in India, Government has refrained from characterising VDA as property or capital asset and applying computation mechanism of respective heads of income. Instead, Government has provided separate charging section and computation mechanism. Though this approach has provided certainty in relation to tax rate and computation of income, it has still left many issues and grey areas open for interpretations and litigations. Some of these issues and grey areas are discussed hereunder.

      Heads of Income

    2. Classification of income under the heads of income is critical as each head of income provides for computation provisions which bears relationship to nature of the charge. Under the scheme of

      the Act, different heads of income provide for different valuation approaches, different tax timing, different provision relating to determining consideration and cost viz., deemed consideration, cost of acquisition under specific mode of asset acquisition under capital gain etc.

    3. The introduction of section 115BBH as charging section and computation provision outside the heads of income, raises a question whether the income from transfer of VDA is a headless income? Because, in case of income from unknown sources covered under section 68 to 69D similar issue arose and judiciary has taken contradictory views.
    4. In respect of income from VDA also classification of income under different head will provide different results. E.g. In case income from transfer of VDA, which were originally received as gift, is classified as ‘Capital gain’, cost to the previous owner may be claimed as cost of acquisition u/s 49. However, if the same is classified as ‘Income from other sources’, benefit of cost to previous owner shall not be available.

      Exclusion of Foreign currency from VDA

    5. Indian currency and foreign currency have been excluded from the definition of VDA. Further, Indian currency and foreign currency shall have meaning assigned to it under FEMA.
    6. As remarked by ex-finance minister Mr Arun Jaitley in parliament that India doesn’t accept cryptocurrencies as a form of legal tender. However, there is neither any regulatory framework at present which say so nor any notification of RBI which excludes virtual currencies of VDA from the definition of currency under FEMA. Recently, The Central African Republic has become the second country in the world after El Salvador to give legal tender status to Bitcoin4.
    7. It raises a question, whether Bitcoin can be considered as foreign currency under FEMA and if so, can be excluded from the definition of VDA?

      Initial Coin Offering to employee as ESOP

    8. Like ESOP many companies, specifically Crypto exchange start ups have started providing ICO as a part of employee compensation plan similar to ESOP. This raises a further debate as to whether the VDA given to employees structured similar to ESOP shall be taxable as income from other sources u/s 56(2)(x) or as income from salary.
    9. As per Clause (iii) of section 17(2) perquisite includes the value of any benefit or amenity granted to or provided free of cost or at concessional rate to an employee who is director, or is having substantial interest in the company, or whose income from salary exceeds Rs. 50,000.
    10. Before introduction of clause (iiia)5 of section 17(2) vide Finance Act 1999, the department relying on the Board Circular6 use to take a position that the stock option granted to an employee at a concessional price constitutes perquisite under section 17(2)(iii). A similar view can be considered in the matter of receipt of ICO structured as ESOP. However, question relating to valuation of such ICO shall remain open as currently no valuation rules have been notified in this regard.
    11. If one were to take other view and seek to tax the same u/s 56(2)(x), the question shall arise whether the receipt of ICO is without consideration or in exchange of consideration of providing services to the company. In later case the receipt of ICO may escape the tax net.
    12. Another issue shall arise with respect to gain on subsequent transfer of VDA received as ESOP. In respect of ESOP taxation, section 49AA provides that fair market value considered for determining perquisite value as per Rule 3(8) of the Income Tax Rules shall be taken as cost of acquisition. However, in respect of VDA there is no such provision to exclude fair market value of VDA considered as perquisites. Only deduction allowed under section 115BBH is cost of acquisition. In such case, income from VDA considered as value of perquisite may be taxed twice, once at the time of receipt of VDA as perquisite and subsequently at the time of transfer of such VDA by employee with deduction of value of perquisite already taxed as cost of acquisition.

      Expenditure incurred on Transfer of VDA

    13. When VDA transaction are executed on crypto exchanges, normally transaction fee is collected in the range of 0.2% to 0.5% of the transaction value7. However, deduction in respect of these expenses shall not be allowed as deduction while computing income from transfer of VDA due express provision in sub-section 2 of section 115BBH.

    14. For the purpose deduction of tax at source u/s 194S, CBDT has clarified that the tax required to be withheld under section 194S of the Act shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering services8. This circular is issued by CBDT for the purpose of removal of difficulty under specific power given under section 194S. In section 115BBH there is no such power given to CBDT. Hence, deduction of expenditure incurred on transfer of VDA based on above circular may not be available while computing income under section 115BBH.

      Gift of VDA

    15. Section 115BBH seek to levy tax on transfer of VDA and the word ‘transfer’ shall have meaning assigned to it under section 2(47) of the Act. Section 47 excludes gift as transfer for the purpose of capital gain. But this exclusion is not available under section 2(47). So at the time of gift of VDA, charge of tax is created under section 115BBH in the hands of the donor. However, in the absence of receipt of consideration and absence any provision relating to computation of deemed consideration u/s 115BBH, the same may not be taxable.
    16. In the hands of recipient of such gift, VDA shall be treated as income u/s 56(2) (x) if difference between fair market value and consideration exceeds Rs. 50,000. For recipient of gift a question may arise as to whether the income from VDA shall be taxed at the rate of 30% as provided u/s 115BBH or as per applicable slab rate. Because 30% tax rate provided u/s section 115BBH to tax income from transfer of VDA, whereas u/s 56(2)(x) charge is provided on receipt of the property. For recipient of gift, income arise not from transfer of property but on receipt of the property and hence income shall be taxed at applicable slab rate / tax rates.

      Exchange of VDA with another VDA

    17. In crypto trading / investment, cryptocurrency swap is a routine feature. Because some cryptocurrencies are having ready convertibility into fiat currency whereas some cryptocurrency doesn’t have ready convertibility of fiat currency. In such scenario a question shall arise as to how to tax such transaction.
    18. When one VDA is exchanged for another VDA it attracts the charge u/s section 115BBH, as the exchange is covered in the definition of ‘transfer’ u/s 2(47) of the Act. But question shall arise with respect to determining consideration of VDA transferred, because there is no valuation mechanism prescribed u/s 115BBH.
    19. For the purpose deduction of tax at source u/s 194S, CBDT has provided guidance in FAQ no 2 of Circular no 13 of 2022 regarding determining value of consideration when one VDA is exchanged for another VDA. As per the guidance provided, exchanges required to convert non-primary VDA into primary VDA and accumulated primary VDA shall be converted into monetary terms at the FAQ no 4 of Circular No 13 of 2022  price prevailing at 00.00 hours of the day by placing market order at 00.00 hours.
    20. However, this guidance shall not be applicable u/s 115BBH. Further, this may not be helpful for determining consideration for the purpose of section 115BBH also. Because many time VDA swap / exchange transactions are executed peer to peer like off market share transaction. Further, there is no regulated crypto exchanges. One cryptocurrency may have different price on different crypto exchanges9. E.g. Buy rate of Ethereum varies on various exchanges ranging from Rs. 1,33,999 on WazirX to Rs. 1,55,819 on InstaCrypto on the same day10.


    21. While the provision relating to manner of taxation and tax rates have been incorporated into the Act, there is no guidance available on valuation of VDA. Aspect of Valuation of VDA remains of utmost importance considering the various issues dealt with supra.

    22. Further, determination of valuation of VDA shall remain a tricky affair considering unregulated nature of crypto space, highly volatile market, different rates on different exchanges on the same day etc. In the absence of valuation rules, applicability of provision of section 17(2) (iii), section 56(2)(x) and charge u/s 115BBH in case of exchange of one VDA for another VDA will pose a challenge.

4. Conclusion

The Indian Govt has taken first step by providing taxation scheme in respect of VDA. However, considering the complex and opaque nature of cryptocurrency industry, it will raise many more issues to resolve, which only time and courts will resolve.

  1.  Notification No 74/2022 dated 30.06.2022
  2. Sec 194O – TDS on payment by e-commerce
  3. Para 2.3 of OECD report on Taxing Virtual Currency issued in 2020.
  4. Central African Republic adopts bitcoin as legal tender (
  5. Which later on omitted and inserted as clause (vi)
  6. Circular No 710, dated 07.1995
  7. It’s not just tax — here are other fees that crypto traders need to watch out for | BusinessInsider India
  8. FAQ no 4 of Circular No 13 of 2022
  9. Why bitcoin prices are different on each exchange (
  10. BitcoinRates : Get bitcoin rates from all bitcoin exchanges in Last accessed on 31.08.2022

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