A broader definition of virtual digital assets is possible

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India could broaden the definition of virtual digital assets to include any new types of assets that develop, as well as fine-tune the taxation provisions for these assets.

The budget for FY23, which was released last week, proposes a flat 30% tax on any income derived from the transfer of any virtual digital asset. From April 1, 2022, the provision will be in effect.

Following conversations with the business and to account for the sector’s dynamic character, officials informed that the government could fine-tune the provisions suggested in the budget to tax virtual digital assets.

“We want to make sure the definition is broad enough to accommodate any new product that emerges as a result of technological advances. In this industry, new things are introduced in a short period.”, a senior government official stated.

According to the official, the government will also make a special provision for any difficulties in implementing the budget provision that may occur.

Peer-to-peer (P2P) or wallet-to-wallet transactions, according to experts, may be exempt from the tax.

Some authorities are also concerned that the planned tax regime, which includes a tax on gifting crypto assets, may create a window for laundering dirty money, according to people familiar with the discussions.

They are also concerned about the route being abused through the use of technology.

While the income tax department would collect tax, tax officials stated that because information on the transferred crypto assets would be reflected in the income tax return, other agencies could query the recipient about the source of the gift.

According to Rajesh Gandhi, partner at Deloitte India, “The IRS has the authority to investigate whether the donor obtained the crypto asset legally, and if not, the value of the crypto asset transferred to someone else can be taxed in the donor’s hands as an undeclared income or asset.”

Another industry expert, however, stated that this would not apply to presents provided before March 31 and that the approach may be abused.

While prospectively, a carry forward and set off of prior losses against income emerging from April 1, 2022, onwards has not been allowed, Sudhir Kapadia, National Tax Leader, EY, believes that clarification on treatment for bringing forward losses is needed.

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