Tax regime for virtual digital assets: boon or bane for the crypto industry?

Wednesday 6 April 2022

Meyyappan N

Nishith Desai Associates, Mumbai, Maharashtra


Ipsita Agarwalla

Nishith Desai Associates, Gurgaon, Haryana


Vibhore Batwara

Nishith Desai Associates, Jaipur, Rajasthan



While the cryptocurrency space in India has been subject to regulatory resistance and ambiguity, it has nevertheless boomed in the last year; at least 400 new crypto startups were launched in 2021 alone[1] and India is ranked second in terms of global adaptation of crypto.[2] The boom in crypto trading can be attributed to a surge in global interest, in addition to the Supreme Court (SC) decision in Internet and Mobile Association of India v Reserve Bank of India (WP (C) 528/2018), wherein the SC set aside, on constitutional grounds, a circular issued by the Reserve Bank of India, which had sought to restrict banking facilities from being offered to participants involved in cryptocurrency transactions.[3] The SC ruling affirmed virtual currency exchanges' fundamental right to trade and do business, guaranteed under the Constitution of India.

Although the SC ruling was a positive move for the industry, there is still ambiguity on the regulatory and tax front regarding the treatment of crypto assets. Further, there were reports that the Indian government (the 'Government') is planning to introduce a bill that seeks to ban all private crypto currencies.[4]

Proposals in the Finance Bill 2022

The Finance Act 2022 (which came into effect on 1 April 2022)[5] (the 'Finance Act') introduced the much-awaited taxation regime for virtual digital assets (VDAs) in India. While the initial industry reaction to the introduction of a tax regime for VDAs was positive,[6] due to a lack of clarification and the regressive stance of the Government, several participants in the industry have felt that the proposed tax regime is regressive in nature.[7] The Finance Minister has also clarified that levying tax on VDAs should not be construed as providing legality to crypto transactions.[8]

Definition of VDA

The Finance Act defines a VDA in an exhaustive manner to, inter alia, include any information, code, number or token generated through cryptographic means, or otherwise, capable of being transferred, stored or traded electronically. Non-fungible tokens (NFTs) are included specifically in the definition of VDAs as a separate category. The government also reserved the power to notify/exclude any digital asset from the definition of VDA. Indian currency and foreign currency are not included within the ambit of VDAs. The policy intention seems to be to clearly delineate fiat currency and VDAs; however, in practice, there could be ambiguity with respect to where the demarcation between currency ends and VDA begins. For instance, stable coins, such as USDT and USDC, are pegged to the United States dollar (which makes them akin to currency). However, their value fluctuates quite often, particularly in the Indian crypto market; hence, the inclination is to treat them as VDAs.

It is pertinent to note that there is no exclusion of 'securities' within the definition of VDA. Hence, there could be an overlap such that certain instruments could qualify both as VDA and 'securities' as defined under securities laws.[9] While a broad definition of VDA may seem necessary to ensure the inclusion of new asset classes created in the future, the all-encompassing definition provided by the Finance Act is likely to spur litigation and cause confusion. The definition as it stands currently may also include securities held in dematerialised form, such as credit card/debit card reward points, airline miles, digital vouchers and in-game currency. This does not seem to be the intention of these provisions. Even the definition of crypto assets proposed by the Organisation for Economic Co-operation and Development (OECD) in its recently released public consultation document on a crypto asset reporting framework focuses on the use of cryptographically secured distributed ledger technology or similar technology.[10]

Taxation of income from VDAs

The amendments in the Finance Act seek to tax crypto transactions similarly to gambling transactions at a rate of 30 per cent, without allowing any deductions (other than the cost of acquisition, if any) or set-off or carry forward of losses from VDAs (section 115BBH). The Finance Ministry also clarified that the infrastructure cost incurred while mining cryptocurrencies is capital expenditure and will not be treated as the cost of acquisition. Hence, the intention seems to be that no deduction shall be allowed, even for the integral business expenditure incurred when earning income from VDAs.

Withholding tax

The Finance Act also obligates the person responsible for paying income from the transfer of VDAs to a resident to withhold tax at a rate of one per cent. The language of the provision does not clearly specify whether the obligation to withhold taxes is on the buyer or the crypto exchange. Further, the provision is wide enough to obligate even non-residents to withhold taxes when paying consideration to Indian residents. With the advent of decentralised finance and the evolution of smart contracts, in the future it may be increasingly possible that the 'person responsible for paying consideration' may not be the exchange or platform, in which case, the buyer could directly have tax deduction exposure.

This withholding tax provision has been particularly worrisome for the industry, and is likely to make volume/margin/day trading unfeasible as a significant portion of the capital would be tied up with the government because of withholding tax.[11] Further, the impact of the withholding provision may be particularly acute with respect to crypto-crypto transactions in which payments would have to be converted to INR to make the TokenDesk (TDS) payment. This would create additional currency conversion rate risks or raise operational challenges in which users may have to pay in INR to be able to receive the crypto into their accounts. While the purpose of introducing a withholding tax obligation was to track transactions and keep a check on tax evasion, if transactions go off-platform or offshore, it will be difficult for the government to track them, and it may also end up losing revenue.

Gift tax

The Finance Act also extends the application of the infamous gift tax to transactions in VDAs. By virtue of gift tax, the receipt of VDAs in excess of INR 50,000 without consideration or for a value less than their fair market value may be considered to be income from other sources in the hands of the recipient. Gift tax may also deter several industry practices, such as the issuance of promotional tokens and airdropping of tokens. Further, in absence of valuation guidelines, it is unclear how the value of VDAs will be computed.

Given the challenges set above, several representations have been made by industry participants to the Finance Ministry to reconsider/rationalise some of the provisions pertaining to VDAs.[12] The provisions of the Finance Bill 2022 (the 'Finance Bill') were recently amended (by the Finance Act); however, no clarity or relaxation was provided on the issues stated above.

Amendments to the Finance Bill

The amendments to the Finance Bill make the provisions of section 115BBH non-obstante to any other provisions under the Income-tax Act (ITA). This could potentially lead to double taxation for NFTs. An NFT generally represents a unique and existing physical or virtual good, service or asset (eg, artwork, music and real estate property). Hence, the tax department may view the sale of an NFT as a combination of two transactions: (1) sale of the NFT itself; and (2) sale of the underlying property/asset represented by the NFT. Given that section 115BBH has been made non-obstante to any other provision under the ITA, tax on the sale of an NFT may be necessarily required to be paid as per section 115BBH, whereas the tax department can further argue that, if underlying property represented by the NFT also gets transferred, it should be further subject to tax.

The amendment to section 115BBH that provides non-obstante status essentially puts an end to questions about the characterisation of income from VDAs for the purpose of the ITA. However, as far as non-residents are concerned, the characterisation of their income from VDAs will continue to be governed as per provisions of the relevant tax treaty, which may possibly exclude the application of new provisions.

Section 115BBH provides that tax is to be paid on income from the 'transfer' of any VDA. At the time of the introduction of the provision, the Finance Bill was silent on the scope of 'transfer'. However, the amendments have clarified that the meaning of transfer shall be the same as that used for the purpose of the 'transfer of capital assets' under the ITA, irrespective of whether the VDA is a capital asset. It is pertinent to note that 'transfer' for the purpose of a capital asset includes the sale, exchange or relinquishment of the asset; extinguishment of any rights therein; or disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner. Hence, the scope of 'transfer' has been enlarged by the amendments to the Finance Bill. The enhanced scope could mean that transactions in the decentralised finance ecosystem and 'burning' of tokens could now potentially be subject to tax under the ITA.

The Finance Bill provides that, if tax has been withheld on a transaction under section 194S, no tax deduction or collection provision under the ITA should apply on such a transaction. Further, in a separate sub clause under section 194S, the same treatment is provided with respect to section 194-O (which provides for a withholding tax obligation on e-commerce operators). However, in the final provision as amended by the Finance Act, only section 194O is subject to section 194S. Hence, even if tax is withheld under section 194S, no exemption under the ITA bars the application of another tax withholding/collection provision.


The intention of the government is to generate revenue from crypto transactions; taxation is a sovereign right of the government. Having said this, the provisions seem to be quite onerous and may possibly shut down the crypto industry in India.

News reports suggest that the government is also working on the characterisation of crypto assets for the purpose of goods and service tax (GST).[13] GST officials are analysing whether crypto assets can be characterised as goods or services, or actionable claims. For the case in which crypto assets are characterised as goods or services, reports suggest that GST may be applicable to the entire transaction value at a rate that could be within range of 0.1–1 per cent. Further, reports also suggest that a few GST officers are of the view that crypto assets, by nature, are similar to lotteries, casinos, betting, gambling and horse racing. For the case in which crypto assets are considered to be actionable claims similar to betting, a lottery or gambling, GST may be applicable to the entire transaction value at 28 per cent. This may further increase tax incidence on crypto transactions. Additionally, the applicability of an equalisation levy on foreign e-commerce operators providing goods/services related to crypto assets to Indian residents (eg, foreign crypto exchanges) cannot be ruled out.

Given that India is a hub for several crypto startups, unicorns and investors, the tax regime should be in line with the realities of the business.


[1] See www.thehindubusinessline.com/money-and-banking/despite-regulatory-concerns-over-400-start-ups-jump-onto-crypto-ecosystem/article37614676.ece accessed 1 April 2022.

[2] See https://go.chainalysis.com/rs/503-FAP-074/images/Geography-of-Cryptocurrency-2021.pdf accessed 1 April 2022.

[3] Nishith Desai Associates represented the Internet and Mobile Association of India (IAMAI) in the case and played a key role in the proceedings.

[4] The Cryptocurrency and Regulation of Official Digital Currency Bill 2021.

[5] Please note that the Finance Bill, 2022, was passed by the Lok Sabha and is awaiting the President's assent before it becomes law.

[6] See https://economictimes.indiatimes.com/tech/tech-bytes/global-players-cheer-crypto-tax-as-first-step-to-nod/articleshow/89333695.cms accessed 1 April 2022.

[7] See www.businesstoday.in/crypto/story/regressive-indias-crypto-sector-hits-out-at-govts-crypto-tax-clarifications-326737-2022-03-21 accessed 1 April 2022.

[8] See www.financialexpress.com/market/taxing-crypto-doesnt-ensure-legal-status-fm/2431862/ accessed 1 April 2022.

[9] S 2(h) of the Securities Contracts (Regulation) Act 1956.

[10] See www.oecd.org/tax/exchange-of-tax-information/public-consultation-document-crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.pdf accessed 1 April 2022.

[11] See www.businessinsider.in/investment/news/crypto-tax-in-india-kicks-in-from-april-heres-all-you-need-to-know/articleshow/90344479.cms accessed 1 April 2022.

[12] See www.timesnownews.com/business-economy/industry/crypto-industry-wants-govt-to-relook-at-30-tax-on-cryptocurrency-gains-rethink-on-proposed-tds-article-89556275 accessed 1 April 2022.

[13] See https://economictimes.indiatimes.com/news/economy/policy/govt-working-on-classification-of-cryptocurrency-under-gst-law/articleshow/90333798.cms accessed 1 April 2022.