Crypto Taxation In India: Rethinking Section115BBH

Critical analysis of Section 115 BBH with India's crypto tax regime highlighting the inflexible treatment of losses and its impact

Introduction

If you like gold , there should be many reasons you should like bitcoin as stated by Cameron Winklevoss now in order to get a deep understanding for the same , we need to delve into the world of cryptocurrency and what does it even mean , there has not been clear definition of it in the income tax act, it has been broadly been covered under Section 2(47A) of the income tax act which defines Virtual Digital Assets broadly including cryptocurrencies, NFTs and other forms of digital assets as specified by the government , it is not applicable on Indian and foreign currency. Now, as per economic times "Cryptocurrency is a form of digital money that works on a computer network without needing a central authority like a government or bank to manage it". Further , section 4 of the act tells us about how and when the tax should be collected with the tax being charged each year at the rates specified in the finance act for that assessment year on the total income earned by the person in the previous year subject to this act with that if any provisions of this act requires tax to be charged for a period not only dealing the previous year , it will be charged accordingly. The tax would either be deducted at the source or paid in advance whichever the act requires. Section 5 of the Income Tax Act, 1961, explains if the person is a resident then all his/her income earned in India or abroad is taxable in India . However , for someone who is not ordinarily a resident only that amount of income which is earned or received in India is taxable . It also clarifies that income already taxed when it was earned won't be taxed again when received. Section further defines who is considered to be a resident or non-resident in India for tax purposes , in order to understand it better an individual who has stayed in India for more than 182 days or 182 days itself in a financial year or if they have spent at least 365 days in India during the last four years prior to the current one and 60 or more in the current one then they would be considered to be a resident and those visiting India 60 has been relaxed to 182 days . HUF is considered to be a resident unless it is controlled and managed entirely outside India . A person is called "not ordinarily resident" they were a non-resident for at least 9 out of the last 10 years, or they stayed in India for 729 days or less In the previous 7 years .

This becomes important to understand as the Section 115 BBH is only applicable to the residents of India now the issue lies in Section 115 BBH inserted after the union budget of 2022- 2023 which imposes a flat 30 percent tax despite having zero net income for instance gain on one crypto transaction: ₹50,000 Loss on another crypto transaction: ₹50,000 which makes the net income zero now in normal tax provision net zero equals to zero tax however under this section , the individual still has to pay 30 percent tax on the profit transaction which makes the person suffers a loss despite having a net income to zero , in this case it would be Rs 15,000 . Now this article tries to analyse and understand how this section particularly impacts the investors and economic market.

Keywords

VDS, EQULITY , INCOME TAX , INNOVATION

Impact and its standing

This section is a clear violation of article 14 of the Indian constitution as it would create an unequal treatment between the crypto and equity investor even if we take the instance of gold investment , it is taxed at the time of profit not at the time of investment making it is an unjust treatment for the crypto investors . This section was added in 2022- 2023 due to increase in the frequency and volume of the VDS, the reasons given for the same were crypto being of high risk as it could lead speculative and high risk further this can help in administration making it simple but this nonetheless cannot ignore the reality as this would be against the derivative in itself , further there are enforcements of TDS in Section 194s which enforces 1%TDSon payments made on the transfer of VDAs. This applies when the transaction is more than Rs 10,000 or Rs 50,000 to a specified in a particular year and this required to be reported to the government in form 26Q which can help with aid in tracking. This goes against the principal of Horizontal equity which states that people with similar income and assets should pay same amount in taxes . This section would lead to reduction in market participation where it would weaken VDS system itself which becomes very important for future and it has been recognised by every developed country further this could even lead to crypto businesses and investors to shift their business to different location with non- regressive tax policies leading to loss of capital with that it would lead to distorted market behaviour discouraging investors to make multiple trades in the fear of unintended tax liability .

This clears shows a regressive deviation from standard taxation principles even though it helps to curb misuse. The author suggests certain recommendations can help make this section better . Allowing set off within VDS class where it permits loss to be set off against gains from another in the same financial year ,Enable VDS losses of 8 years to be carry forwarded under controlled mechanisms as it is capital gains allowing them to claim exemptions moreover introducing such basic exemption slabs can help protect small investors ensuring tax fairness and would also improve tax fairness.

One of the main issue till now is that even though the supreme court decision in 2020 overturned the decision of 2018 with RBI banning banks to deal with crypto and it has been recognised but is unregulated and is not recognised as legal tender. RBI,SEBI and Ministry of finance regulates them but is till now not a recognised legal tender . One of major reasons of RBI given is the financial risk and money laundering but cryptocurrency has become a reality as of now and a clear regulations for the same can not only attract innovation and growth but also minimise financial risks . With Singapore being a prime example with their payment service act of Singapore , the transactions made can be regulated, this would rather establish a framework to protect its consumers from such activities and Section 115 BBH of income tax in India is one step of the hurdle .

Conclusion

India's way of taxation on cryptocurrencies given only by the residents of the country has a become a big Gray area for justice and equality making it quite a harsh inflexible treatment of losses especially disallowance of set off results in taxation on notional gains which is against equality, this would lead to high risk of market disruptions and impact small investors eventually leading to loss in capital and innovation. As virtual digital assets have become more main mainstream given India's influence and since it is still a developing country innovation becomes an innovation becomes an important aspect in it, The author suggests amendments in the section 115 BBH to allow set off and further introduce exemption slabs for small investors requiring a framework that is not punitive but regulatory ensuring fairness , transparency and inclusivity of India in digital market .

References

Books

The Income-Tax Act, 1961. Act No. 43 of 1961, Government of India, Ministry of Law and Justice, 13 Sept. 1961.

Research papers

Grant Thornton Bharat LLP. Union Budget 2022-23: Comprehensive Analysis. Grant Thornton Bharat LLP, 2022. https://www.grantthornton.in

Congdon, William J., Jeffrey R. Kling, and Sendhil Mullainathan. Behavioral Economics and Tax Policy. National Bureau of Economic Research, Working Paper No. 27634, Aug. 2020. https://www.nber.org/papers/w27634

Jain, Aditya. Cryptocurrency and Social Justice: A Study of Indian Taxation Laws on Emerging Virtual Challenges. Centre for Tax Law, University of Cambridge, 2023. https://www.ctl.cam.ac.uk

Articles

https://cleartax.in/s/tds-under-section-194s-of-income-tax-act

https://economictimes.indiatimes.com/definition/cryptocurrency

https://www.kychub.com/blog/cryptocurrency-regulations-in-india/#:~:text=Earlier%2C%20the%20RBI%20

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