Transactions in cryptocurrencies have increased manifold. The very character of crypto assets, and the ability to hold, transfer and transact investors in the jurisdiction, make them an easy target to be used for illegal activities or tax evasion. The limited visibility of tax authorities on these transactions creates difficulty in verifying profits and determining taxes on such transactions.
OECD Guidance: With a view to increase transparency among nations, OECD (Organization for Economic Cooperation and Development) has developed the Crypto Asset Reporting Framework (CARF). The Common Reporting Standards (CRS) require jurisdictions to receive information from financial institutions and banks and exchange such information with other jurisdictions. The CARF is a step forward in this direction as crypto assets are not automatically covered by the CRS that deal with traditional financial assets and fiat currencies. With CARF, the reporting scope has been expanded to include digital assets and consequently visibility on intermediaries, exchanges and e-wallet service providers.
The OECD defines crypto assets as a digital representation of value that relies on a cryptographically secure distributed ledger or a similar technology to validate and secure transactions. Crypto assets are those that can be held and transferred in a decentralized manner without the intervention of traditional financial intermediaries, including stable coins, derivatives issued as crypto assets, and certain non-fungible tokens (NFTs). There are exceptions to this, such as currency issued by a central bank, specified electronic currency products, etc. The framework provides guidance on various aspects of entities and individuals, data reporting responsibility and data collection requirements, subject to the types of transactions covered, and relevant information to be reported, etc.
India is a signatory to the multilateral Competent Authority Agreement on the automatic exchange of financial account information. Thus, India will soon have to follow the necessary framework so that the flow of information can be smooth.
Crypto Taxation in India: Taxation of Digital Assets in India was introduced in Budget 2022, when a tax of 30% was proposed on all gains from the transfer of virtual digital assets (VDAs), allowing deduction of any expenses (acquisitions) other than the cost of) ) nor indemnified for any loss. Further, the buyer is required to deduct TDS at 1% on all VDA transfers beyond a specified limit with an intention to widen the tax base and avoid tax leakage due to non-reporting.
The tax provisions of India define VDA as any information or code or number or token (not being Indian currency or foreign currency) generated by any name, by cryptographic means or otherwise. It provides a digital representation of the value exchanged, with or without consideration, with or without a promise or representation of the value or actions inherent as a store of value or a unit of account and its use in any financial transaction or investment therein. includes but is not limited to investment schemes, and may be transferred, stored or traded electronically, including non-fungible tokens or assets of a similar nature, by whatever name called, and any other digital asset notified by the Central Government is included. The circulars were issued in June 2022 to provide additional guidance on tax withholding compliance requirements.
With the announcement of CARF, the government now has an opportunity to frame rules considering the reporting guidelines of CARF. This could lead to the implementation of CARF for investors as well as service providers residing in India and covering a wider range of digital assets. To meet the requirements, service providers will need to have an advanced data collection mechanism such as KYC documents, ensure that the identity of each participant is established, ensure that appropriate taxes are withheld for each transaction, Appropriate mechanism for record keeping and reporting etc. .Investors may be required to mandatorily disclose norms in addition to the existing provision of tax levy and tax withholding.
The guidance provided by the OECD is a welcome move to bring standardization and regulation to trading in digital assets, although it may add to the responsibility of exchanges. This will provide visibility to regulators and tax authorities on transactions, apart from clarity on their obligations to investors and exchanges.
Aarti Rawate is a partner of Deloitte India.
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