Budget 2022: Missing word ‘Crypto’ in law sets off alarms

Linda D. Garrow
The new regulation to tax virtual digital assets could create trouble for many multinationals and companies due to the broad definition of the framework that doesn’t use the word “cryptocurrency” anywhere, say tax experts.

The broad definition of “virtual digital assets” and “any information, code, or otherwise” in the newly announced framework could cover a large range of intellectual properties and even online assets created by multinationals, as per the experts.

This could eventually mean that taxmen may be able to question certain assets or intellectual properties, and they could eventually be taxed at a higher rate.

Many tax experts are seeking a definitive clarification from the government in this regard. They believe, as was done in the past, taxmen will vie for maximum taxation based on their own interpretations.

“The proposals toward taxation of virtual digital assets seem to have multiple loose ends with the kinds of wordings used to define the said assets, such as ‘Information’, ‘or Otherwise’. Also, the said assets have specifically been excluded from the definition of Indian or foreign currency,” said Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting. “With such language used under section 2(47A), it may trigger multiple issues as the reach of the definition could be beyond the imagination of anyone when anything and everything has started operating in the digital world with new concepts of wallets, platforms, etc. coming in.”

This also comes at a time when many large multinationals are moving toward blockchain technology for storing their information regarding clients and projects.

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“The definition that the government has right now is too broad and could capture some digital assets created by multinationals and even Indian companies over the blockchain or other online infrastructure,” said Amit Singhania, a partner at law firm Shardul Amarchand Mangaldas.

Under India’s transfer pricing regulations, the tax department has the right to scrutinise transactions between an Indian arm and its parent located outside India.

“In several cases, some of the work done by Indian entities can be questioned as being part of digital or virtual infrastructure that can generate income in the future. The tax department can ask the company to value these in India, and this could lead to a 30% tax under the new regulation,” a tax expert advising one of the top three internet giants told ET.

Many large companies have Indian offices that tend to do some research and development. As per the current regulations, these Indian arms merely pay tax on the money they receive—called cost plus.

Many tax experts hope that the government will carve out a specific definition for cryptocurrencies in a way that doesn’t target other companies’ digital assets.

ET first reported on December 4 that the government was looking to add cryptocurrencies to tax law.

The finance minister on Tuesday introduced a 30% income tax on returns from digital currencies. This would mean that investors would have to cough up 30% tax on the returns they make from trading or investing in cryptocurrencies.

The government also introduced a 1% tax deduction at source, or TDS, on digital assets. This, say tax experts, would only be applied to cryptocurrency exchanges when they sell or transfer crypto assets to investors or traders.

Experts say that the 30% tax would also not be allowed to be set off against any other losses or expenses.

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