India Finance Minister Nirmala Sitharaman announced a series of tax reform measures on Tuesday as part of the nation’s 2022 annual budget. While the measures do not propose a change in the income tax slabs, they propose a new tax regime on transfers of cryptocurrencies and include various incentives such as increased deductions for government employees, the introduction of “Updated (i.e. amended) returns,” reduced alternate minimum taxes and surcharges for cooperative societies, and new tax exemptions.
The measures are part of a larger tax reform package, Finance Bill 2022 (“the bill”), and seek to establish and promote a stable, predictable and trustworthy tax regime. If passed, the bill will amend the Income Tax Act of 1961 (“the Act”) “to continue reforms in direct tax system…removing difficulties faced by taxpayers and rationalization of various provisions.”
Perhaps the most important provision of the bill is the new tax regime on “virtual digital assets.” The bill defines virtual digital assets as:
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; a non-fungible token or any other token of similar nature, by whatever name called; or any other digital asset, as the Central Government may, by notification in the Official Gazette specify.
The above definition is broad enough to cover all forms of cryptocurrencies, although the government has left the door open to specifically exclude any digital asset from this definition through notification in the Official Gazette.
Among other things, the new “cryptocurrency tax” regime taxes income from the transfer of any virtual digital asset at a 30% tax rate; denies deduction for any expenditure or allowance used in computing such income, except cost of acquisition; restricts offset of losses from transfers to gains from transfers of virtual digital assets; creates withholding obligations on such transfers; and taxes gifts of virtual digital assets at the hands of the recipient.
The Chairman of the Central Board of Direct Taxes Jagannath Bidyadhar Mohapatra, while welcoming the new cryptocurrency tax regime, cautioned that “taxing crypto currency under the new legislation does not attach any legality” and that crypto trade “do not ipso facto become legal or regular just because you have paid taxes on that.”
Other reform provisions of the bill include an increase in the tax deduction limit from 10% to 14% on employer’s contribution to the National Pension Scheme account for state government employees “to bring parity with central government employees;” introduction of a provision to file updated/amended returns to declare additional “income only,” within two years from the end of the relevant assessment year (i.e. three years from original due date of filing); reduction in alternate minimum tax from from 18.5% to 15% and surcharge from 12% to 7% for cooperative societies having total income between ₹10 million and ₹100 million; and tax relief for disabled individuals on lump-sum insurance payments.
These are just to name of a few of the “direct tax” reform provisions, and there are many more covering tax litigation management and indirect taxes. As observed, the bill is quite expansive and represents the nation’s first major targeted attempt at taxing the cryptocurrency market. If it is passed, the cryptocurrency tax regime will become effective in April 2023.