Taxation regime for virtual digital assets and its regulation

• The budget announced a taxation regime for virtual digital assets which led to evolving manifestations of cryptocurrencies, codes, and non-fungible tokens.

What are Virtual Digital Assets?

• The finance bill defined the term “virtual digital asset” by entering a new clause (47A).
• As per the proposed new clause, a virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means.

Rationale Behind Taxation

• Popularity: Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially.
• Growing market: Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset.
• Increased transactions: There has been a phenomenal rise in such transactions and the magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
• Prevalence of gifting: The gifting of virtual digital assets is also a popular mode of exchange.

Difference between Virtual Digital Assets and Digital Currency

• A currency: issued by the central bank even if it is a crypto.
• However, anything which is outside of that, loosely, all of us prefer it to be cryptocurrency but they are not currencies.
• These can be referred to as Virtual Digital Assets.
• Virtual Digital Assets also include Non-fungible tokens or NFTs, which are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. NFTs can also be used to represent individuals' identities, property rights, and more.
• This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.
• The Finance Minister clarified that what the RBI will issue in the next fiscal will be the digital currency. This will be called Digital Rupee.

Impact of Taxing Virtual Digital Assets

• It is the first formal recognition by the Government of increasingly popular financial instruments, such as cryptocurrencies, and applications, such as non-fungible tokens.
• The Government may still not consider them fully legit, yet the tax regime indicates the hard option of an outright ban that was signaled earlier.
• It is also an indication from the Government on implementing its stated plan of recognizing them as assets and not currencies ahead of greater policy clarity that is expected by way of the proposed cryptocurrency Bill.

Way Forward

• The delay in arriving at this decision pre-empts Indian start-ups and innovators from developing products and ideas that can be scaled up globally given the nature of these assets.
• In November, the Government had indicated a forward-looking approach to crypto market oversight.
• It is time those words are matched with a clear regulatory framework soon instead of ambiguous waffling and dithering.