By Rupin Chopra and Apalka Bareja
In March 2020 the Supreme Court in re Internet and Mobile Association of India v. Reserve Bank of India overturned the RBI circular banning the trade of cryptocurrencies in India. Since then the Indian crypto industry has grown manifold to develop into a market with the highest number of crypto asset holders. In light of this proliferation and mass adoption of crypto assets across India and its seemingly unregulated & anonymous nature, the Government of India was pressed to bring in provisions via the Finance Act, 2022 to levy tax and TDS on these assets. With effect from July 1, 2022, the provision put in place for Tax Deduction at Source (TDS) of Virtual Digital Assets (VDA) would become effective. These latest norms are by the virtue of the new section 194S of the Income Tax Act, 1961 (hereinafter referred to as ‘IT act’), which was added via the Finance Act, 2022.
Tax Deduction at Source (TDS) for Virtual Digital Assets
Section 194S of the Income Tax Act, 1961 brings to fruition the Government’s plan to tax VDAs in all their forms. For this purpose, the latest amendments to the IT Act has defined VDA as:
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 the Official Gazette specify.
This definition, effectively, gives the central government the sole power and authority to define and designate what amounts to a VDA.
Moving further, Section 194S of the act lays down the following norms:
1. A mandatory TDS @1% for transfer of a VDA to a resident for any consideration amount.
2. This section mentions two thresholds till which TDS deduction is not mandated, first for an individual or HUF whose total income do not exceed beyond₹ 50 Lakhs in case of a profession or ₹1 Crore worth of total sales in case of a business. For such a scenario the upper limit for not paying TDS on VDAs is ₹50 thousand worth of VDA transactions in a financial year. In case of an individual or a HUF (including firms, LLPs, companies) which does not fall in the aforementioned classification, this upper limit is capped at ₹10 thousand per year.
Effect of Amendment
The new tax regime for VDAs, on one hand, gives some semblance of recognition to crypto as a legitimate asset but on the other hand, imposes a considerable and foreboding tax burden on current and potential investors. In this context, the following are the major effects on investors, platforms, and future crypto-related policies:
1. Section 194S when read with new section 115BBH applicable w.e.f. 1.4.2022 paints a worrisome picture for crypto investors in India. While section 194S mandates TDS @1%, subject to the aforementioned thresholds, section 115BBH imposes a flat tax of 30% plus applicable surcharge and cess on income from VDAs. Except for the cost of acquisition, there are no other deductions available to the taxpayer like the facility to set off losses.
2. Further, the new amendment puts the onus on deducting TDS on the crypto exchanges. Thereby, increasing their compliance and regulatory burden. In case the buyer and seller of VDAs are individuals, both need to pay TDS with respect to the transfer of VDAs.
3. It must be noted that the definition of VDA, as mentioned in the IT act, excludes foreign currency from its ambit. Therefore, implementation of these tax norms with respect to countries like El Salvador which have declared Bitcoin as a legal tender poses a visible loophole.
It is pertinent to note that the new tax regime for VDAs will increase the tax burden on the budding crypto industry. The resultant tax and compliance burden is being interpreted as the government’s way to wean the Indian investors off investing in VDAs. Given the current bear market situation in crypto, these new norms pose another hurdle to inflow of equity in the market and makes it even more unprofitable for those who want to cut their losses short and take the exit route.
 2020 SCC online SC 275
 THE FINANCE ACT, 2022
 Section 2(47), ibid
 CBDT Circular No. 13/2022 dated 22.06.22