Mankind's constant growth has made him proficient at understanding his surroundings and putting them to better use for future inventions. The same tendency has been observed in the evolution of cyberspace. The virtual world has not only improved our connectivity with our surrounds, but it has also opened the door to further progress in terms of its use and application.

The continued use of the virtual world is resulting in the evolution of new terms, phrases and things. The outer world adjusts and improves in response to changes in the virtual world's environment. The rise of e commerce and e business, as well as the digitization of numerous services, has resulted from increased engagement and connectivity for the goal of providing work and services.

Similarly, transactions are no longer limited to government regulated physical money. New forms of consideration are also emerging, with functions similar to those of existing currencies. Cryptocurrencies, non-fungible tokens (NFTs), and other virtual digital assets are now examples. The emergence of these cyber-based transactions necessitates the development of a well-defined framework to make their operations more practical.

As a result, in the Union Budget for 2022-23, the government has chosen to take a step further in expanding its reach in the cyber world by introducing virtual digital assets for the first time. As a result, The Finance Bill has been submitted to insert and amend the Income Tax Act,1961 paving the path for new areas to emerge.

Definition of Virtual Digital Assets

To provide a firm foundation on virtual digital assets, a new section 47 A of the Income Tax Act of 1961 will be inserted, defining the scope of virtual digital assets. To simplify the term, virtual digital assets include any electronically generated number, token or code which can offer the value of being functional for financial transaction and investment and can be stored, transferred and traded electronically. This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.

The section also includes NFTs as part of virtual digital assets and such NFTs are to be specified by the government. NFT in general term include the trade digital art, music, photos videos, etc.

The government has also authorized the exclusion of all other digital assets from the list of virtual digital assets. Simply put, virtual digital assets are assets determined by the Government of India and are therefore taxable. Other assets are not treated as VDA. It is to be noted that the Indian currencies as well as foreign currencies has been kept out from the ambit of the definition of VDAs.

Tax on Virtual Digital Assets

In addition to the definition, the finance bill also proposed to insert a new section 115BBH under INCOME TAX ACT, 1961. This section specifies that amount from the transfer of income from the virtual digital assets will be charged at 30 percent.

Moreover, while computing the income from transfer of such assets, no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed. Further, no losses will be set off against income from any other sources, if such loss is incurred from transfer of virtual digital assets.

The bill also had inserted a new section with effect from the 1st day of July, 2022, namely: –– 194S which states that if any person responsible for paying to a resident any sum of a virtual digital asset, had to pay a tax amount to one percent. Also, it will be the duty of the person to ensure that before releasing the consideration, the tax has been paid in respect of such consideration for the transfer of virtual digital asset.

It is to be observed that the amount of tax is not payable if the amount does not exceed rupees 50,000 in case when payable by a specified person and rupees 10,000 in case the amount is payable by non-specified person. Specified person under this section means being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred.

It is also proposed in this section that, if the amount is taxable under section 194O and 194S, Then the amount is taxable under section 194S only and not under section 194O.

Virtual Digital Assets as Gifts:

Gifts made to specific relatives or on specific occasions, however, are free from taxation under the Income-tax Act of 1961, regardless of the size of the gift. Gifts from parents, siblings, and other relatives, for example, are tax-free. Gifts received on the occasion of a wedding, via a will or inheritance, or in anticipation of the donor's death are likewise excluded from income tax, regardless of their value. However, a present of more than Rs 50,000 received from a friend on the occasion will be taxable as friend doesn’t come under the ambit of relative.

The question now is whether the same gift taxation regulations that apply to physical assets would apply to virtual digital assets as well., bill proposed to amend section 56 of the act the definition of property under the Income-tax Act would be enlarged to encompass virtual digital assets.