[Opinion] Budget 2023: Cryptocurrency Taxation for Non-Residents Demystified

Authored by CA Naveen Wadhwa & CA Dipen Mittal

The growth of the global software and technology industry has had a significant impact on India. On the one hand, many software developers have taken employment opportunities abroad, while on the other hand, there has been a surge in investment in cryptocurrencies within India.

However, when these two trends occur simultaneously, they can create complexities when it comes to tax laws. Individuals who invest in Bitcoin while they are residents of India and then transfer them in subsequent years when they become non-residents may face challenges in understanding their tax obligations.

In this article, we have discussed how the residential status of an individual impacts the tax treatment of Virtual Digital Assets (in short, ‘VDAs’). VDAs cover cryptocurrencies (Bitcoin, Ethereum, etc.) and NFTs.

Union Budget 2022 introduced a new regime to tax the gains arising from the transfer of VDAs at a flat rate of 30%. A resident pays tax on his global income, and a non-resident pays tax only on Indian income, which either arises or is received in India. An income is said to have nexus with India when it arises from business connections, property or assets, sources of income or transfer of capital assets situated in India. When VDAs are held as capital assets, the income from their transfer will be taxable in India if the situs (or location) of the VDA is in India.

Determining the location of VDA is a difficult proposition because there is no permanent location where a cryptocurrency can be said to be located. When a person becomes a non-resident in India and a resident of a partner foreign country with which India has signed a double taxation avoidance agreement (‘DTAA’), India may lose the right to tax the income from VDAs. This is because many DTAAs provide the taxing rights of capital gains (other than from immovable property and securities) to the resident country. Some examples are DTAAs signed with Singapore, Mauritius, and the UAE.

However, India reserves the right to tax every capital gain arising within its jurisdiction in some DTAAs. Some examples are DTAAs signed with the UK or the USA. However, to tax such capital gains, they should arise from a capital asset situated in India.

A capital asset is any property, whether immovable or movable. The movable property includes physical assets (like securities, paintings, drawings, and jewellery) and intangible assets (like intellectual property rights).

VDAs can be categorised as intangible assets because, as per accounting guidance, these are identifiable non-monetary asset that lacks physical substance. An asset is identifiable if it can be separated or arises from contractual or legal rights. It is considered separable if it can be sold, transferred, licensed, rented or exchanged either individually or in combination with a related contract, identifiable asset or liability.

The classification of VDA is now more precise, but the next question arises: Where is the physical location of an intangible asset?

The Courts have stated that the location of the owner of an intangible asset is the closest approximation of the location of the intangible asset unless local legislation dictates otherwise. As the Indian tax laws do not contain any explicit provision to determine the location of VDAs, the location of the intangible asset may be said to be the domicile of its owner. If the owner is not a resident of India, then the income generated from its transfer cannot be taxed in India. This situation arises because such income cannot be said to have any nexus with India, although it is transferred through an Indian exchange. However, the taxability arises if the funds are received in an Indian bank account as it establishes the nexus of an income with India because receiving an income is one of the taxable events.

The Government should clarify its stand in the upcoming budget by laying down the guidelines to determine the location of VDAs. To safeguard India’s right to levy tax on VDAs, either the situs could be linked to the location of exchange through which the VDAs are transferred or to the location of the private key or of the person who has control of the private key. Where a custodian or a trustee controls the private key, the location of the controller should determine the situs of the cryptocurrency.