Cryptocurrencies refer to a mathematics-based, decentralized convertible virtual currency created and managed using cryptography. Some cryptocurrencies which are available in the market are Bitcoin, Ethereum, Solara, and Binance Coin etc. However, none of the cryptocurrencies have been recognized as a legal medium for payments, i.e., currency in any country except El Salvador.
In India, cryptocurrencies constitute an ambiguous area. Since, India has the highest number of crypto owners, which effectively means that there is a tremendous popularity for cryptocurrencies as a lucrative investment option but the reality is that the RBI has still not recognized them as a legal tender.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Bill) is still pending for discussion by the government. The Finance Minister, Nirmala Sitharaman has categorically clarified that taxing cryptocurrencies has no relation to their legality.
The Union Budget 2022 clarified the taxation of income from cryptocurrencies and other virtual digital assets, including non-fungible tokens. Even though this does not confer legal status to cryptos, it does give a hint that maybe an outright ban would not be on the cards.
TDS provisions have been introduced alongside to trace the transaction trail and widen the tax base by Section 194S at the rate of 1% on payment for the transfer of virtual digital assets to a resident. These provisions are proposed to be effective from July 1, 2022.
This would obviously affect the crypto exchanges as taxpayers will shift to long -term investment instead of trading. Besides, there are various issues regarding crypto exchanges that can arise as there is still no clarity provided in budget proposals as to how they are required to comply with the proposed provisions as they are neither buyers nor sellers of cryptocurrencies, they are just providing exchange services to the buyer and seller of cryptos.
Challenge for CFOs
Similarly, there is ambiguity on the implications in other laws such as Goods and Services Tax.
The major problem which could arise is that there are no clear guide lines on how the proposed 1% TDS provision shall be applied on such transactions as transactions in cryptos shall be effected through the crypto exchanges.
This is because they are neither buyers nor sellers of cryptocurrencies; they provide exchange services to the buyer and seller of cryptos. Moreover, the buyer and seller of such transactions are not known to each other. Hence, there is an ambiguity whether the provisions of TDS would be attracted on crypto exchanges as well which can in turn, create a lot of confusion in complying with these TDS provisions for the CFOs of such exchanges.
Further, as new proposals shall take effect from the FY 2022-23, whether taxpayers can set off the losses that arise in FY 2021-22 in subsequent years is another area of uncertainty.
There are other important issues such as there is no clarification by the department on the implications of GST law on the sale/ purchase of the cryptos and whether the crypto shall be treated as goods or services. However, till the time a separate and express clarification comes in this regard, the CFOs of the crypto exchanges may take a view that 18% GST would be attracted to facilitate the transactions of cryptos.
There still persists many grey areas which still need clarity and the tax proposals introduced by Budget 2022 along with the dilution of Version 1.0 of the Crypto bill give mixed signals on whether India would finally open up to cryptocurrencies or not. However, it is clear that even if it does, the Government of India and the RBI are in no mood to encourage cryptocurrencies.
About the Author - Amit Maheshwari is Tax Partner, AKM Global, a tax and consulting firm with inputs from Yeeshu Sehgal, Cryptocurrency Expert, AKM Global.
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