India's Income Tax Bill, 2025 now classifies virtual digital assets as property and capital assets, enabling tax, regulation, and asset seizure. Capital gains attract a flat 30% tax plus 1% TDS on transfers, though high rates and enforcement challenges risk pushing trading offshore, necessitating comprehensive regulatory adjustments for investor protection.
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The Income Tax Bill, 2025 treats Virtual Digital Assets (VDAs) as property and capital assets.
For the first time, VDAs are legally recognized as property under Section 92(5)(f) and capital assets under Section 76(1). This empowers authorities to tax, regulate, and seize VDAs during investigations, akin to cash, gold, or real estate.
India joins jurisdictions like the UK, Australia, and New Zealand, which treat VDAs as property. The U.S. classifies many as securities, further integrating them into regulated financial markets.
Capital Gains Tax: Profits from selling, transferring, or exchanging VDAs are taxed under capital gains provisions. For example, a ₹10 lakh profit from Bitcoin is taxed as short-term or long-term gains.
Flat 30% Tax Rate: Income from VDA transfers is taxed at 30%, with no deductions allowed except the acquisition cost. This contrasts with the UAE’s 0% personal income tax on VDAs in certain cases.
1% TDS on Transfers: A 1% Tax Deducted at Source (TDS) applies to all VDA transfers, including peer-to-peer transactions. Small traders (₹50,000 threshold) and others (₹10,000) are exempt. However, this policy has led to a 97% drop in Indian exchange trading volumes and an 81% user decline due to migration to offshore platforms.
Mandatory Disclosure: Entities dealing in VDAs (exchanges, wallet providers) must report transactions in a prescribed format under Section 509. Non-reporting risks classification as undisclosed income under Section 301.
Asset Seizure: Authorities can seize VDAs during tax raids, mirroring U.K. practices where courts freeze crypto assets in disputes.
Annual Information Statements (AIS): VDA transactions are included in taxpayers’ AIS, ensuring automated tracking of financial profiles.
Taxes on VDAs provide a new revenue stream, critical as India’s VDA market grows.
Prevents misuse for illicit activities like money laundering by integrating VDAs into the formal financial system.
Reduces ambiguity for stakeholders, encouraging responsible participation in the digital economy.
The 30% tax rate and lack of deductions (e.g., mining costs) are harsher than in many jurisdictions, potentially stifling innovation and pushing traders offshore.
Tracking decentralized VDA transactions requires robust infrastructure. The 1% TDS has paradoxically reduced tax revenue by ₹2,489 crore (2022–2024) due to capital flight.
The framework focuses on taxation but neglects investor protection, market regulation, and standardized guidelines, operating in “silos”.
Stringent policies risk losing talent and businesses to jurisdictions like Singapore or the UAE, which offer favorable tax terms.
Lowering the TDS rate to reduce administrative burdens.
Permitting loss offsets and aligning the 30% tax rate with other income categories.
Developing a comprehensive regulatory framework for investor protection and market stability.
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PRACTICE QUESTION Q. How do decentralized finance (DeFi) platforms challenge traditional banking systems? Discuss the risks and opportunities they present for India’s financial inclusion goals. 150 words |
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