- Date : 03/02/2022
- Read: 3 mins
Digital currencies have been brought under a tax framework in this budget, and an RBI-issued digital fiat currency is in the making.
Digital currencies were discussed in detail in the recent budget, and there’s a proposal to issue a ‘digital rupee’ supported by blockchain technology in 2022-23. This will be backed by the Reserve Bank of India (RBI) and will therefore enjoy legal status. Blockchain technology also empowers other digital currencies and assets, including cryptocurrencies and Non-Fungible Tokens (NFTs).
Blockchain technology and digital assets
Blockchain is a decentralised ledger technology that is updated on a real-time basis. It has been adopted by the Government for its transparency, authenticity, and security. Digital currencies based on blockchain can be used for conducting both domestic and international transactions; there will be no requirement of any financial intermediary (such as a bank). While operationally, these assets resemble cryptocurrencies, they will be regulated by the central authority in India (RBI) and enjoy the status of legal tender.
Also Read: Union Budget 2022: Key Highlights
Union Budget FY2022-23 announcements on digital assets
- In a first, the Government has moved to build a tax framework for cryptocurrencies and NFTs. The income from the transfer of such digital and virtual assets will be taxed at a flat rate of 30%.
- Takeaway: This comes as a relief to digital asset market participants amidst the fear of these digital assets being completely banned.
- Except for the cost of acquisition, no other form of expense can be claimed as a deduction towards this income.
- Takeaway: This could reduce the overall turnover of the industry and might impact the gains of digital assets, which have in the past witnessed unprecedented growth momentum.
- Further, loss from the transfer of virtual assets cannot be set off against any other income, and there is no provision to carry forward the losses to set off in subsequent years.
- Takeaway: The elimination of the possibility of crypto-assets becoming illegal will encourage many participants to invest/trade in these markets instead of continuing to sit on the fence amidst the uncertainty.
- The digital rupee backed by the RBI would be launched in FY 2022-23.
- Takeaway: Many other countries have launched their digital currency; this is yet another step towards the digitisation of the Indian economy.
- To capture the transaction details of digital assets, the government has levied 1% TDS on payments made with respect to the transfer of virtual assets. This is applicable to transactions above a certain monetary threshold.
- Takeaway: The anonymity of individuals transacting in the market and the inability of tracing the transactions to curb illegal/illicit transactions has been one of the major challenges that the governing bodies has faced in the past. Applicability of TDS would eliminate this anonymity and is, therefore, a welcome proposal.
- The budget also proposed gifting of digital assets to be taxed in the hands of the recipient. The government has plans to introduce an elaborate bill on cryptocurrency, which intends to address all challenges associated with digital assets.
- Takeaway: The nuances of digital assets are eagerly awaited by the investor community. Although it is unlikely that cryptocurrency will gain the status of legal tender, this step moves the asset away from being completely banned or becoming an illegal instrument.
Addressing the digital asset situation in India was critical in light of the growing presence of various virtual assets and their ability to transform the economy. So this is a small step in the right direction.