Students are expected to write about the recent tax announcement on crypto highlight the debate around it and present the views with challenges and wayforward.
Introduction
While presenting the Union Budget 2022 government proposed a tax of 30 per cent on virtual assets, effectively legitimising trading of private cryptocurrencies and non-fungible tokens. This is broadly in line with the Centre’s plans to have a fiat digital currency, while disallowing use of private virtual coins as legal tender.
Body
The power to levy taxes is prescribed under Article 246 which grants power to the Parliament as well as state legislatures to impose taxes.
Article 265 provides that no tax can be imposed or collected without the authority of law.
Today, with the rise of cryptocurrencies and its underlying technology, the world stands at the helm of another such revolution.
Cryptocurrencies like bitcoin are decentralised, digital currencies relying on a peer-to-peer network which operates without the need for a third-party intermediary like the Reserve Bank of India.
Coupled with lack of regulatory guidance, its unique technical aspects create huge complications in its taxation.
While the government wishes to actively encourage blockchain technology, it has been resisting popular usage of cryptocurrency because once the unit of account of one of these transactions changes from rupees to any cryptocurrencies, then the possibility of recovery of tax would become farcical.
So, if the government wishes to reap the revenues from blockchain transactions, it will have to recognize cryptocurrency, and not just INR, as a unit of account.
Challenges:
Absence of explicit tax provisions has led to ambiguity and uncertainty: Lack of clarity as to whether the GST on crypto transactions is applicable only on Rupee transactions alone or even on transactions through crypto currencies.
Difficult to impose tax due to cross-border transactions: Usually, taxpayers may cryptocurrencies and store in online wallets, on servers outside India. In such cases, it becomes difficult to pinpoint which jurisdiction’s tax laws would become applicable.
Anonymous transactions: The identities of taxpayers who transact with cryptocurrencies remain anonymous and hence it becomes quite difficult to keep a tab on the individuals who are trading in cryptocurrencies. Usually, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.
Difficult to track down on tax evaders: One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks.
Wayforward:
To Impose a 1 per cent tax deduction at source (TDS) of transactions above a monetary threshold to trace the transition.
The US government has made it mandatory for all tax payers and third party intermediaries (Exchanges, wallet providers, miners etc) to disclose all the cryptocurrency related transactions.
Explicit and Unambiguous provisions should be incorporated in the Income tax act.
The existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto transactions.
Conclusion
The country should regulate these transactions in a manner that permits a reasonable balance between consumer security and legitimacy. A streamlined tax regime will be essential in the formulation of a clear, constructive and adaptive regulatory environment for crypto currencies.
