[Opinion] Impact of Residency on the Tax Treatment of Transfer of VDA

Rohith K Rangan – [2022] 145 taxmann.com 133 (Article)

Virtual digital assets, came, conquered and are here to stay. Exhaustively defined in section 2 of the Income-tax Act (“Act”), simply put, Virtual digital assets (“VDAs”) are any information/token generated through cryptographic means providing a digital representation of value which can be transferred, stored or traded electronically. VDAs have waded through the tense waters of the Indian regulatory system into India’s economy, rapidly forming part of people’s economic activities.

The “Crypto Conundrum” series essentially aims to explore several unanswered questions on taxation of virtual digital assets. In this article we will focus on the impact of residency on the tax treatment of transfer of VDAs.

Legal History

Ever since the rise of Bitcoin near the end of the 1st decade of the Millennium, several VDAs have been on the radar of investors and traders globally. The Reserve Bank of India had taken a conservative view on the evolution of VDAs in India advocating against any transactions in VDAs. Spiking several writ petitions, the Hon’ble Supreme Court’s judgment in the case of “Internet and Mobile association of India v. Reserve Bank of India” [2020] 115 taxmann.com 53/158 SCL 448 effectively permitted transactions in VDAs. Thus, started the journey of VDAs in India.

With the urgent need to address the aspects of taxation in VDAs, Finance Act 2022 introduced taxing provisions and TDS provisions for transactions in VDAs.

Legal provisions

As per provisions of section 115BBH of the Act any gains of an assessee on transfer of VDAs is subject to tax at 30% (including applicable surcharge and cess). It is also pertinent to note the following salient points:

• Section 115BBH is a non-obstante provision
• Transfer as defined section 2(47) of the Act applies to VDAs held both as stock-in-trade or capital assets
• No deduction other than cost of acquisition or set off of any loss (including vice-versa) shall be allowed

This provision primarily aids in the setting the taxation rate for transfer of VDAs. For chargeability and scope of income one needs to still refer to the core provisions of the Act namely, sections 4, 5, 6 and 9. A combined reading of these provisions enunciate that residents are taxed on their global income. Hence, it is necessary to deep dive into the legal provisions concerning non-residents.

1. Individuals: Residency is governed by a complex set of intertwined provisions
2. Company: Residency in case of companies other than Indian companies is governed by the place of effective management (“POEM”)
3. Other assessees: Residency is a question of whether during that year the control and management of the affairs is situated wholly outside India. If it is in the affirmative the assessee is a non-resident. This segment includes firms, AOPs, trusts, BOIs, HUFs, etc.

In case of non-residents, income deemed to accrue or arise as per section 9 of the Act is chargeable to tax under the Act. Section 9(1)(i) encompasses income arising through or from any business connection in India, or any property or asset or source of income in India, or through the transfer of a capital asset situated in India. The pointed question arises then, how can the situs of VDA be ascertained.

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