Certain provisions of the Finance Bill 2022 may be harsh on the taxpayer. For example, gains arising from the transfer of Virtual Digital Assets (VDA), are to be taxed at 30 per cent, without any deduction for expenditure.
Also, set-off of and carry forward of losses incurred on the transfer of VDA to the subsequent years against any other income is also not permitted. Further, the gift of such assets will also be taxed in the hands of the recipient. To ensure advance tax collection, payments made in relation to transfer of VDA to Indian residents are liable to withhold tax at 1 per cent.
The choice of certain words (such as ‘information’, ‘code’ and ‘number’) makes the definition extremely broad. Given the wide definition of VDA, clarification is expected in the Act as to whether assets or benefits like digital gift cards/ vouchers, loyalty or cashback points on cards, airline miles, and similar assets would constitute VDAs. Furthermore, the Bill is silent on the set-off of a loss on VDA with capital gain on transfer of VDA in the same year.
To comply with tax deduction at source (TDS) provisions, sometimes the buyer may not be able to identify the seller at all. The ‘person responsible for paying consideration’ may not be on the exchange or the platform, resulting in tax deduction exposure for the buyer. As TDS provisions are also applicable on “in-kind” payments, cash flow issues may arise for the buyer, who will have to arrange for funds to deposit taxes. Further, in cases of a crypto barter, the obligation to deduct tax is still unclear and could fall both on buyer and seller.
As the valuation of VDAs in case of a gift, promotional tokens issued by crypto exchanges to their users or crypto-to-crypto transactions is challenging due to its volatile nature, valuation guidelines along with the meaning of “cost of acquisition” for VDA must form a part of the Finance Act.
Unexplained cash credit
Another issue is whether and how such transactions need to be disclosed and offered to tax for FY 2021-22. Further, clarity on GST provisions should be provided in the Finance Act 2022 to provide for an effective and clear tax regime for VDAs.
Section 68 of the Act taxes unexplained credits consisting of loans or borrowing in the books of account of any assessee as income. The Bill requires taxpayers to explain the source of funds in the hands of its creditor also to substantiate the genuineness of its borrowings, with an exception provided for a few SEBI-regulated entities.
This forces taxpayers to conduct diligence on the lender and seek details of its source of income. Though the memorandum states that this additional onus of proof of satisfactorily explaining the source is in the hands of the creditor, it would not apply if the creditor is a well-regulated entity, and it has not been mentioned in the section. Trade payables, bank borrowings, credit card payments unintentionally get covered under this amendment which could not be the intention. Further, ‘satisfactory information’ is very subjective, and could lead to litigation.
TDS on benefit or perquisite
The new Section 194R requires the perquisite provider to ensure that tax has been deducted at the rate of 10 per cent of the value of the perquisite, before providing such perquisite. As per the current law, under Section 28 of the Act, only the recipient has the obligation to pay the tax on the perk.
The recipient was free to value the perquisite and pay tax accordingly. However, with the proposed addition of Section 194R both the provider and the recipient will need to deduct/ pay tax on the value of the perquisite, which will require both parties to mutually agree on a single valuation. Hence, a valuation mechanism is expected of the Finance Act 2022. Non-resident (NR) payers typically do not have withholding obligations with respect to transactions occurring in the ordinary course of business.
However, the scope of Section 194R is wide enough to require NR providers to ensure that tax is deducted (or paid in full by the recipient) on perquisites released to Indian recipients.
Long term capital gain
The Bill proposes to cap the surcharge on tax at 15 per cent on LTCG arising on transfer of assets, regardless of the capital gains. As such, the maximum effective LTCG tax rate on the sale of shares for resident Indians declines from 28.496 per cent to 23.92 per cent and for NR from 14.248 per cent to 11.96 per cent, which will also boost private investment.
The benefit of a lower surcharge on all LTCG shall be applicable to individuals, HUFs, AOPs (members who are companies) and other artificial judicial persons. Since high-net-worth individuals make investments through a private trust, clarity for the benefit of a lower surcharge to be extended to private trust (non-corporate AOPs) is awaited.
The authors are Chairman and Director respectively at Nangia Andersen, a business consulting firm
March 20, 2022