There has been a phenomenal increase in transaction in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime
Smt Nirmala Sitharaman, Union Finance Minister, Budget Speech 2022
The Virtual Digital Asset (VDA) cannot be understood without knowing a bit about the underlying technology – Blockchain – sometimes referred to as Distributed Ledger Technology (DLT). It makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing. For a simple understanding, if a document is created in the cloud and access is given to a set of people having the right to edit it, then every modification that is done is recorded and is transparent.
Blockchain is, of course, much more complex and complicated than this, but it gives an equivalence for simple understanding. Blockchain is an awesome technology which will have multiple uses in various domains that can disrupt and revolutionise many industries, especially the financial world. This tech has been found to reduce risk, is transparent and eliminates the chances of fraud in countless ways.
Cryptography is not alien to us, Indians. The western researchers have certainly looked at the cryptography in Mesopotamia, which dates back 1500 BCE and in clay tablets. If we search for the Cryptography in Bharat, we can find that the Vedas were loaded with cryptography and that too high levels of mathematical formulae. Vedas too is considered to date back 1500 BCE.
A peep into the article titled, A study of Encoding System in Vedic Era and Modern Era by K Lakshmi Priya and R Parameswaran, states thus:
The Sanskrit verses written in the Vedic era are not just the praises of the Gods they are also numerical codes. In ancient India there were three means of recording numerals in Sanskrit words, which are Katapayadi system, Bhutasamkhya system and Aryabhata numeration. These systems were used by many ancient mathematicians in India.
With the advent of computing, the modern-day cryptography took a fast pace and we have today very advanced ones which have enthused many to use it as a medium of exchange without the support of fiat. The latest form of cryptography – Elliptical Curve Digital Signature Algorithm (ECDSA) fortifies Bitcoin and such other “cryptocurrency” systems which ensures higher security.
Metaverse is no longer considered as an “Asimovian” fiction but a soon to be a virtual reality. “Although not required, cryptocurrencies can be a great fit for a metaverse. They allow for creating a digital economy with different types of utility tokens and virtual collectibles (NFTs). The metaverse would also benefit from the use of crypto wallets, such as Trust Wallet and MetaMask. Also, blockchain technology can provide transparent and reliable governance systems.” States Binance Academy. (if you have not heard about Binance, then it is the parent of WazirX, the Fiat to Crypto Gateway from India.)
As the citizens of the world, you and I will have to be aware of the Blockchain, Crypto, NFT and Metaverse! It is in this context the Union Budget 2022 has proposed a Tax on profits made from Virtual Digital Assets, which means inter – alia, code or number or token (not being Indian or Foreign Currency) generated through cryptographic means or otherwise includes Non–Fungible Tokens or any other token of similar nature. We the uninitiated tend to call this “cryptocurrency”! The income from these VDAs is taxed at 30% without any allowance or deductions from the profit. The loss made will entirely be yours, and there cannot be a set-off or carry forward for losses incurred. The Financial Year starting from April 1 will attract this tax.
Don’t rush to the exchange and sell off the VDA before March 31, 2022 so that you avoid this 30% tax. There was a confusion as to the taxation of income from these VDAs, but no one disputed the fact that there will be a tax. The question was under which head–Capital Gain or Income From Other Source or that from Business. Now this has been laid to rest. The tax is at the maximum rate.
Has this made the trading, transaction and investment in these assets legal? Well, I would like to reserve my comment. Many intermediaries and marketing companies for these VDAs have started informing potential investors that this has been made legal in India. Let us examine.
It is fairly settled law that the Tax Department is not required to check the legality of the income, but they will tax any income – legal or illegal. Once it is found that there is a business, legal or illegal, the income-tax law says that the profits of the business shall be chargeable to tax. The Tax is on the Profits. The word “profits……. is to be understood”, observed Lord Halsbury in Gresham Life Assurance Society v. Styles, “in its natural and proper sense – in a sense which no commercial man would misunderstand”. So, stating that a tax on profit has given legitimacy on VDAs is not true at all. A person being booked for any offence can be assessed to tax for the income illegally earned by him by that act. One cannot take a defence that the State has also become a party to the illegal act by getting a pie from the ill-gotten gains!
To conclude, a word of caution to those who aspire to be an investor of these modern VDAs including Cryptos, Non-Fungible Tokens, etc. Don’t be surprised if you get some unsolicited invitation for investment offering “Guaranteed” and “High” returns. Be informed that if the deal is too good to be true, it probably is! Be careful before you hand over your money to someone and do research on this new investment. Take time to learn more about the “ICO” and the like before venturing into it. It was in early January, the “Morris Coin” Scam was unearthed by investigating agencies and it is said that they were able to rope in over 11 lakh investors across South India and the scam size may be as high as Rs. 3,000 crore.
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