Virtual digital assets and Digital Currency

GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
GS-3: Science and Technology- developments and their applications and effects in everyday life.

Context: Finance Minister, in her Budget 2022 speech, announced a 30 per cent tax on income from virtual digital assets.

She further clarified that no deduction in respect of any expenditure or allowance shall be allowed while computing such income except the cost of acquisition.
Additionally, she also proposed a TDS on payment made in relation to the transfer of virtual digital assets at 1 per cent above a monetary threshold.
In short, the finance minister has proposed a flat 30 per cent tax on digital asset gains regardless of any long-term or short-term holding by the investor.
Additionally, if a virtual digital asset investor incurs losses during the transaction, it can’t be set off against any other income.
The gifting of virtual digital assets has also been proposed to be taxed in the hands of the recipient.

What are virtual digital assets and how are they different from digital currency?

Reserve Bank will be issuing a digital currency, a currency is a currency only when it is issued by the central bank even if it is a crypto.
But anything which is outside of that loosely all of us refer it to be cryptocurrency but they are not currencies.
Union Government clarified that what the RBI issues in the next fiscal will be the digital currency and everything else apart from that are digital assets being created by individuals and the government will be taxing the profit which are made during transactions of such assets at 30 per cent.
Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill.

What are the Benefits of Central Bank Digital Currency?

Alternative to physical cash
Instantaneous process: Transacting with CBDC would be an instantaneous process. The need for inter-bank settlement would disappear as it would be a central bank liability handed over from one person to another.
Reduces cost of currency management: India’s fairly high currency-to-GDP ratio holds out another benefit of CBDC. Large cash usage can be replaced by CBDC. Also, the cost of printing, transporting and storing paper currency can be substantially reduced.
Need of the hour: If the private currencies gain recognition, national currencies with limited convertibility are likely to come under some kind of threat. CBDCs thus become the need of the hour.
Volatility: CBDCs, being the legal tender by Central Bank, will not witness any volatility as in the case of cryptocurrencies.
Easy tracking of currency: With the introduction of CBDC in a nation, its central bank would be able to keep a track of the exact location of every unit of the currency.
Curbing Crime: Criminal activities can be easily spotted and ended such as terror funding, money laundering, and so forth
Scope in Trade: Foreign trade transactions could be speeded up between countries adopting a CBDC.

How does the government define virtual digital assets?

In the explanatory memorandum of the Finance Bill, the government stated, “To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted to section 2 of the Act.
As per the proposed new clause, a virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically.
Non fungible token and; any other token of similar nature are included in the definition.

Connecting the dots:

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