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Legal Article by - SHRADHA JAIN (This Article was written by her during her Internship)
Abstract
Technology transformation in a world has emerged Virtual Digital Assets (VDA) in the space of digital currencies. Investors are interested in exploring new age financial instruments such as Bitcoin, Blockchain and Cryptocurrencies. Involvement of artificial intelligence in digital trading system delve into Decentralization. Monitoring digital currencies transactions globally is uncontrollable. It is crucial for government to identify taxation events in digital currencies in the area of taxation. This research focus on adaptation of taxation policies and regulatory frameworks.
Introduction
Cryptocurrencies independently operated by central banks and government to decentralized digital assets and utilizing technique cryptographic to secure events and transactions. Regulatory framework reforms in the worldwide lead to involvement of international organisation cooperation who addressing issues of taxation among economist, investors, business leaders and tax payers.
Traditional financial market is limited with taxation on transaction, reporting and tracking mechanisms. Complex structure of digital assets navigates the government for adaptation taxation policies framework to ensure transparency and compliances process. The report representing regulatory and taxation challenges posed by the rise of digital currencies like Bitcoin and how governments are adapting their policies to address these new financial instruments.
The rise of digital currencies
Rapid growth in a digital currency in India increases cross-border investment more than $1 billion, cryptocurrencies and bitcoin transaction storing value due to their decentralization and unidentifiable nature. Finance Ministers have organised summit for international organisations and G20 Leaders to analyse the risks emergence by crypto-assets. the tax policy and evasion implications have been largely unexplored, although forming an important aspect of the overall regulatory framework, comprehensive analytical approach needed to Taxing Virtual Currencies and policy gaps across the main tax types (income, consumption and property taxes) for such a large group of countries. Taxing Virtual Currencies also considers the tax implications of a number of emerging issues, including the growing interest in stablecoins and ‘central bank digital currencies’; as well the evolution of the consensus events used to maintain blockchain networks and the dawn of decentralised finance. This report was presented at the G20 Finance Ministers and Central Bank Governors’ meeting on 14 October 2020. It provides key insights and a number of considerations to help policymakers wishing to improve their tax policy frameworks for virtual currencies world economy shifted toward cashless faster digital payment transaction.
Taxation background on Digital Currencies
Virtual digital Assets (VDA) has introduced in a Finance Bill 2022, VDA create a information in the form of code, numbers and cryptographic means. Government specified digital assets in official Gazette it exclude any type of coupons, cards, vouchers, rewards and incentives received purchase or sale of good and services. Finance Minister inserted 115BBH on Virtual Digital assets and w.e.f 01april, 2022 tax rate was 30% on VDAs Total Income. Deduction will consider only if cost of acquisition of Virtual Digital Assets from value of consideration received will be allowed and succeeding Assessment year no setoff carried forward will be allowed in a case of loss and expenses to assesses. Government not clarify head of income in income tax. In Indian 5 head of source of income
1. Income from House property
2. Income from salary
3. Income from business and Professions
4. Income from capital gain
5. Income from other sources
Digital Assets TransacƟon depend on duraƟon, purpose and nature of Assets (VDAs). If assesses purchase Virtual Digital Assets for more than 36 months then it is investment and Income classified in Head of the capital gain.
If the transaction in Virtual Digital Assets (VDAs) are frequent and continuous then assess income considered as business income which will be levied tax @30% plus surcharges and cess. 194S TDS section will be levied 1% tax on the persons for paying any sum by the way of consideration for transfer of a virtual digital Assets, shall at the time of credit of such sum or at the time of payment whichever is earlier. no deduction will be required if consideration paid less than Rs 50000 (for specified persons) or Rs 10000 (in other cases).
In case of virtual digital assets, it is neither considered as good or services in definition of Good and Services Tax (GST). Virtual currencies cover under the money so GST applicability on money is excluded from the scope of GST.
Taxation challenges: Government Adaptation Digital Assets
The inception of digital assets in a unclear regulatory structure for the tax treatment of crypto assets, bitcoin and virtual currencies (VDAs). This article highlights key challenges in taxation brought about by digital assets and the measures governments are taking to adopt.
Lack Of Clear Guidance and Legislative Frameworks: - No legislative framework is a biggest challenge for controlling events and transaction in digital assets network. This regulatory uncertainty creates confusion among investors and traders, making it difficult to enforce provision taxation policies. Without clear guidelines, taxpayers are unsure about their obligations, leading to tax avoidance non-compliance and tax evasion.
Assets valuation: - difficulty to identify the source of income in an income tax due to volatile and uncertain nature of digital currencies. due to lack of a standardisation, it makes valuation process lengthy in classification system arise in a complexity of taxation.
Tax Evasion Risk: - pseudonymous nature of crypto arise tax evasion includes engaging in illegal activities such as terrorist funding or anti money laundering cases to avoid paying taxes. In union budget in 2022-2023 to minimise tax evasion risk Finance Minister its own introduce Digital Rupee by RBI.
Adapting Existing Mechanism: - Major laws impose relating to digital currencies Government start addressing clear taxation provision regarding digital currencies, improving transparencies and uncertain virtual space. For economic development government several steps laid down to adapting E-business, E-investment and E-payment.
International Corporation: - Indian government representing crucial aspects through public awareness campaigns with others countries collaborations, several steps has been taken by Finance Ministries and Government invite G20 leaders on internation organisation to analyses risks and frauds involvement in Digital Currencies.
Cross-Border Transaction: - complicated cross-border transaction tracked by blockchain analysis, reporting third party statement, agreements between international countries and regulatory framework with the help of Artificial intelligences.
Measure taken by government to adapting Digital Assets
Government has taken several steps to moves forward adaptation of virtual digital Assets and introduce harmonized legal framework, concerned over legal and regulatory regimes. Here are some important initiatives.
Regulatory Structure formation: - The Union Minister IT and Electronic said that the government focusing on consumer protection, rapid innovations, financial stability, and national security. “Safety and trust as an obligation cast on platforms is a framework that our government.”
Digital Rupee: - India are focusing on stablecoins that real purposes to linking real world digital currencies, Central Bank Digital currency CBDCs to provide a secure and efficient digital currency option. aim to exploring existing payment systems and enhance financial inclusion. The Reserve Bank of India (RBI) launched a pilot project for the digital rupee in 2022-23, to make monetary payment system efficient.
Blockchain implementation: - Government setup Research and development blockchain hub for promoting innovation with the supporting industries in digital assets and blockchain technology. Initiatives like regulatory sandboxes allow companies to test new technologies in a controlled environment, maintain sustainable trading system, fostering innovation while ensuring regulatory compliance.
Conclusion
Digital Assets has continuously expanded, finance ministry have not clarified legal status in taxations. virtual digital Assets regulation full of challenges, lack of specified regulation, technology and complexities delve into it so this may lead to tax evasion and money laundering. it is space of continuous evaluation, policy making and updating tax regulations regular process of fast and complex innovation, on the basis of limited information, and while balancing the core objectives of securing efficiency, fairness and revenue in taxation against the risk of sƟfling innovation. The challenges are both conceptual and practical aspect in taxations. Conceptually, the dual nature of cryptocurrencies as both investment assets, means of payment and business purpose. Primary purpose for development of regulation framework to creates potential difficulty in capturing capital gains and losses in their assets thereby no objections to use digital currency. For the TDS, GST and Income tax while many technical and conceptual issues of arise in analysing tax, the critical step is to ensure that virtual Digital Assets (cryptocurrency & bitcoin) is treatment the same way as national currencies. cryptocurrencies are emerging and developing economies in which demand for digital Assets arises, relatively strong taxations infrastructure.
References
1. Chenoy, D., & Nagappan, M. (2024). The impact of India’s 1% TDS on Virtual Digital Assets: A call for reform. The Economic Times. The impact of India's 1% TDS on Virtual Digital Assets: A call for reform - The Economic Times (indiaƟmes.com)
2. InternaƟonal Journal of ScienƟfic Research. (2021). Cryptocurrency: A Study on Digital RevoluƟon, its Impact on Indian Economy. The impact of India's 1% TDS on Virtual Digital Assets: A call for reform - The Economic Times (indiaƟmes.com)
3. InternaƟonal Journal of Computer Research and Technology. (2023). A Study on Cryptocurrency and its Impact on Indian Economy. IJCRT2307145.pdf
4. SSRN. (2020). Opportunities and Challenges of Cryptocurrencies in India - A Study. Opportunities and Challenges of Cryptocurrencies in India - A Study by Syed Bilal Irfan, Malavika M :: SSRN
5. Sudeep Chandra June 10,2024 - The Daily Guardian the daily guardian.pdf
6. IMF Working Paper Fiscal Affairs Department Taxing Cryptocurrencies*2023- wpiea2023144- print-pdf.pdf
7. Majmudar & partners internaƟonal lawyers - Indian tax implicaƟons in cryptocurrency transacƟons by: Ravi S. Raghavan, Partner, Tax and Private Client Group, Majmudar & Partners, India Crypto-TaxaƟon-in-India-Feb-21-2024.pdf
8. OECD BeƩer Policies for BeƩer Lives -Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues- flyer-taxing-virtual-currencies-an-overview-of-tax-treatmentsand-emerging-tax-policy-issues.pd
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