Virtual Digital Assets: Opening New Gates For Transaction And Trading
Mankind's constant growth has made him proficient at understanding his
surroundings and putting them to better use for future inventions. The same
tendency has been observed in the evolution of cyberspace. The virtual world has
not only improved our connectivity with our surrounds, but it has also opened
the door to further progress in terms of its use and application.
The continued use of the virtual world is resulting in the evolution of new
terms, phrases and things. The outer world adjusts and improves in response to
changes in the virtual world's environment. The rise of e commerce and e
business, as well as the digitization of numerous services, has resulted from
increased engagement and connectivity for the goal of providing work and
Similarly, transactions are no longer limited to government regulated physical
money. New forms of consideration are also emerging, with functions similar to
those of existing currencies. Cryptocurrencies, non-fungible tokens (NFTs), and
other virtual digital assets are now examples. The emergence of these
cyber-based transactions necessitates the development of a well-defined
framework to make their operations more practical.
As a result, in the Union Budget for 2022-23, the government has chosen to take
a step further in expanding its reach in the cyber world by introducing virtual
digital assets for the first time. As a result, The Finance Bill has been
submitted to insert and amend the Income Tax Act,1961 paving the path for new
areas to emerge.
Definition of Virtual Digital AssetsTo provide a firm foundation on virtual digital assets, a new section 47 A of
the Income Tax Act of 1961 will be inserted, defining the scope of virtual
digital assets. To simplify the term, virtual digital assets include any
electronically generated number, token or code which can offer the value of
being functional for financial transaction and investment and can be stored,
transferred and traded electronically. This amendment will take effect from 1st
April, 2023 and will, accordingly, apply in relation to the assessment year
2023-2024 and subsequent assessment years.
The section also includes NFTs as part of virtual digital assets and such NFTs
are to be specified by the government. NFT in general term include the trade
digital art, music, photos videos, etc.
The government has also authorized the exclusion of all other digital assets
from the list of virtual digital assets. Simply put, virtual digital assets
are assets determined by the Government of India and are therefore taxable.
Other assets are not treated as VDA. It is to be noted that the Indian
currencies as well as foreign currencies has been kept out from the ambit of the
definition of VDAs.
Tax on Virtual Digital AssetsIn addition to the definition, the finance bill also proposed to insert a new
section 115BBH under INCOME TAX ACT, 1961. This section specifies that amount
from the transfer of income from the virtual digital assets will be charged at
Moreover, while computing the income from transfer of such assets, no deduction
in respect of any expenditure (other than cost of acquisition) or allowance or
set off of any loss shall be allowed. Further, no losses will be set off against
income from any other sources, if such loss is incurred from transfer of virtual
The bill also had inserted a new section with effect from the 1st day of July,
2022, namely: �� 194S which states that if any person responsible for paying to
a resident any sum of a virtual digital asset, had to pay a tax amount to one
percent. Also, it will be the duty of the person to ensure that before releasing
the consideration, the tax has been paid in respect of such consideration for
the transfer of virtual digital asset.
It is to be observed that the amount of tax is not payable if the amount does
not exceed rupees 50,000 in case when payable by a specified person and rupees
10,000 in case the amount is payable by non-specified person. Specified person
under this section means being an individual or a Hindu undivided family, whose
total sales, gross receipts or turnover from the business carried on by him or
profession exercised by him does not exceed one crore rupees in case of business
or fifty lakh rupees in case of profession, during the financial year
immediately preceding the financial year in which such virtual digital asset is
It is also proposed in this section that, if the amount is taxable under section
194O and 194S, Then the amount is taxable under section 194S only and not under
Virtual Digital Assets as Gifts:Gifts made to specific relatives or on specific occasions, however, are free
from taxation under the Income-tax Act of 1961, regardless of the size of the
gift. Gifts from parents, siblings, and other relatives, for example, are
tax-free. Gifts received on the occasion of a wedding, via a will or
inheritance, or in anticipation of the donor's death are likewise excluded from
income tax, regardless of their value. However, a present of more than Rs 50,000
received from a friend on the occasion will be taxable as friend doesn�t come
under the ambit of relative.
The question now is whether the same gift taxation regulations that apply to
physical assets would apply to virtual digital assets as well., bill proposed to
amend section 56 of the act the definition of property under the Income-tax
Act would be enlarged to encompass virtual digital assets.
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