Budget 2022: CBDT Clarifies Crypto Tax, Cash Credit, Perquisite And Reassessment Provisions
CBDT Chairman JB Mohapatra on how to compute crypto tax, problem of source of source of funds, cracking down on perquisites.
Finance Bill, 2022 has several new provisions that are causing much confusion among stakeholders, pertaining mostly to the new tax on virtual digital assets, unexplained cash credit, withholding tax on perquisites and scope of reassessment proceedings.
In an interview with BloombergQuint, chairman of the Central Board of Direct Taxes, JB Mohapatra, explained the the intent behind these provisions.
Crypto Tax
Effective Apr. 1, any income from transfer of a virtual digital asset will be taxed at 30%. No deductions will be allowed except cost of acquisition. Loss arising from transfer of virtual digital asset cannot be set off against any other income, nor carried forward. Transfer of virtual digital asset to a resident will attract 1% TDS (tax deducted at source).
How should an investor compute the cost of acquisition—will it include incidental charges like brokerage fees, exchange fees, gas charges, etc?
The surplus which is to be computed on a trade in a virtual digital asset has been very briefly stated. The manner in which it will be computed is that the surplus will be carried out or will be worked out only by reducing one item which is the cost of acquisition and here cost of acquisition is a bare cost of acquisition at this point in time.
Whether you can load anything more over the cost of acquisition—that is not provided. I will be treading cautiously on this area had I been an investor, not to load any amount other than the bare cost of acquisition.
From a plain reading of the provision, it’s clear that set-off can’t work inter-assets. So you can’t set off crypto gains against, for instance, loss in mutual funds. But what’s not clear is within the universe of crypto assets, is set-off allowed? So can investors set off loss on bitcoin against gain in some other crypto currency? Or loss in bitcoin against gain in NFTs, assuming all this is in the same financial year.
All of the trading in the virtual digital asset are grouped together. So, if you make a particular stream of trading in a particular currency then you have a profit and in the other currency, you have a loss—you want to set them off.
If you want a guidance on this, it'll come on a later date. I will be erring if I pre-empt the answer and say something off the cuff right now. So I'm not going to commit on that.
But the point is well taken, that within that Chapter 12 special provision, if in one variety of currency you have a profit and in the other you have a loss, there should be set-off available. This is a very valid argument. I agree to the question which has been raised but for an answer, give us a day or two.
How will the TDS provision work when you’re executing trades on an exchange? Who will deduct TDS here and deposit with the government because the payer might not know the party at the other end. Similar issue will occur if an Indian resident is executing the trade on an international exchange or a decentralised exchange.
We will have to wait. We'll hear all voices before we take a call but the larger intent is to map the whole universe of the virtual asset trade in the country, and the investment in the trades.
This [TDS] has been the traditional and the easiest way in which we can track investments or profits generated or losses incurred in this kind of trading. So under this provision, you have the liability to withhold TDS at the time of payment and not at the time of receipt.
Who will be making the payment? It will be made by the purchaser. The onus is on him at the time of the purchase.
I know that there will be teething problems. You make investment either directly or through P2P.
When it comes to P2P, which is also a sizable, it is essential that you know the counterparty. If it is routed through the exchange, there is every reason as to why you will not be knowing the counterparty who has placed the purchase order against your sell order—that you will not be knowing and justifiably so but in P2P situations if you are knowing the counterparty, then there is no problem.
So, you can't let the opacity hang around this business for a long time.
When it happens through the exchanges, let’s say, domestic Indian exchanges, will the onus be on the exchange to deposit the TDS from April 1?
I'm told and this has been reported that exchanges in crypto function in a manner which is different from the normal stock exchanges. Here, the exchanges create the market, are the market and they are market participants also. They take positions counter to the investors in many cases or in most of the cases in some exchanges.
The purchase order of a customer may be directly dealt with by the exchange itself through its own stock. If that is happening, then whoever is to pay will have to deduct that 1%. If the exchange bears that responsibility, then it has to deduct the tax, TDS.
So, the point what I'm trying to convey to you is that the provision should be applied in all cases of transaction whether we're doing P2P or through the exchange
The Cash Credit Provision
Section 68 of the income tax law deals with unexplained cash credit. It says that any sum credited in a taxpayer's books will be considered as her income if;
The taxpayer offers no explanation about the nature and source of such credit.
Explanation offered by a taxpayer about the nature and source of such credit is not satisfactory in the opinion of the assessing officer.
The Finance Bill, 2022 has proposed a change to this provision to say if a taxpayer raises a loan or borrowing, then the credit amount will be deemed to be unexplained, unless:
The source of funds of the creditor is explained.
The explanation is to the satisfaction of the assessing officer.
Borrowings from SEBI-registered funds are exempt from this requirement.
The amendment is essentially putting the onus on borrowers to ask lenders for their source of funds. What has prompted this move?
This is a significant amendment but we want to be very clear on what we're intending to do with this one.
Under section 68, if there is a credit—that is, if there is a loan or a borrowing or a receipt, or an amount, in the name of somebody else in your books that means, you have received the amount from him, whether by way of loan or borrowing or a normal receipt. The taxpayer has to explain where the money is coming from. He has to identify it.
Now in the case of private companies, the verification of the person in whose name the credit stands, the investigations were going up. We were looking at the share capital or share application money.
On a source of source verification, you can go only one step forward because it is limited only to that. Now, we have extended the source of source verification inquiry to loans and borrowings. The point is, it is not stated in so many words, but in whispers it has been stated and it has been confirmed in many of our investigations. Life is difficult for an investigator in the income tax department or any other agencies precisely because a whole set of entry providers are operating in grey, and in dark areas of the economy.
They are introducing illicit cash and making investments through layering of various accounts. Entry of cash from one end and through layering of 14, 15 or 17 bank accounts appearing as a cash credit in the 18th account. It's a very onerous task of going to the real source of the deposits or the real source of that deposit in somebody's account.
If the loan or the borrowing is untainted, it is coming from the right source with credibility and creditworthiness, is identifiable— there’s no problem or worries for those kinds of investments.
But if the aim is to rotate unaccounted money through layering, section 68 with the new provisions should be coming hard on that.
What are borrowers expected to do now? Every time, for instance, a startup raises debt capital, what documents, evidence is it expected to ask for from the lender?
At the end of the day, just the PAN or the bank account do not suffice to indicate that the nature of the remittances is regular.
Take it from me, the PAN or the balances in the bank account don't really conclusively prove that the remittance is from the right regular sources. I don't want the taxpayers to get into second and third degree of investigation to find out—they would be rather busy in their business.
But do the due diligence in whatever way you can to eliminate any angle of illicit nature in the funds which you're receiving, that would help. And the tell-tale signs surrounding that investment, surrounding the money which is coming in, from your gut feel or your work-day experience, you as a taxpayer will very well realise where the money is coming from and whether it is coming from the right sources or from sources which are not to be relied on.
10% TDS On Perquisites
Under the income tax law, an individual is supposed to declare and pay tax on benefits or perquisites like gift, travel facility, hospitality, cash or monetary grant.
Noting that there are leakages in this reporting, the Finance Act, 2022 has proposed that the entity paying the perquisite should deduct 10% if the aggregate value of such benefits exceeds Rs 20,000 during the financial year.
The provision will not apply if the person providing the benefit is an individual with business turnover less than Rs 1 crore. The threshold is Rs 50 lakh in case of professional.
Is this a revenue mobilisation move or should we view this as an enforcement fix because you noticed that recipients are not paying tax on perquisites?
What is being brought in is TDS on benefits and perquisites provided by businesses. But what is not written is that these are payments in consequence to business promotion. A wholesale dealer taking retailers on a business promotion tour to Singapore or giving them discount coupons to spend at the retail shops of their choice of that particular amount—if they achieve this target and that target and all those things. So, the business promotion related expenses should be coming over here.
Many of these payments, cash or kind, mostly kind, they're not being captured in the system. This is a benefit of the perquisite as understood in section 28 also. We are now realising that this is an area that needs to be tracked.
So, this is just to have a clear overview of the business promotion expenses and how much has been paid out in a year by businesses.
Some specific doubts have been raised on valuation of the benefit or perquisite. I’ll use an example raised by one of the tax consulting firms—in a debt restructuring scenario, would a write-back of loans be seen as a benefit or perquisite as has been contended in the past? Should lenders be deducting this 10% in such situations? Is that the intent?
We have never thought about this one. So, you're giving us ideas. I will not say whether it is intended or unintended but I don't know how to classify this particular question, but your point is noted.
Tax Reassessments
The law grants tax officers power to reopen past tax assessments if they have reason to believe that certain income had escaped assessment. The scope of information basis which reassessment proceedings can be initiated has now been expanded.
The proceedings can be initiated if the assessing officer has evidence that income more than Rs 50 lakh is likely to escape assessment. The evidence, documents can be in the form of:
An asset;
Expenditure in respect of a transaction or in relation to an event or occasion; or
An entry or entries in the books of account.
There's a view that the reformatory approach that Finance Act, 2021 took on reassessments has been undone with these amendments.
Absolutely not. I beg to disagree.
If the undisclosed part or the undeclared part which should be an asset—an asset is defined as land, building, bank balances, loans and deposits of a value of Rs 50 lakh. You should have information and you should have what you call it, this kind of an asset that will qualify. What I'm saying is that, we’ve also put in little things like expenditure or a transaction in relation to an expenditure or an occasion or an event.
Unaccounted expenditure—suppose you get the details of those unaccounted expenditures and entries in books of accounts these are two or three little things which we have done, we have not undone anything which was done in the last budget.
What we have done is, we have made it more practical. Be realistic about things which are happening on the field. Suppose you have documented it and the counterparty has stated that yes, this jewelry had been purchased by Mr. so and so and I have received Rs 50 lakh in cash—that is unexplained expenditure. The old legislation would not have captured this although it is an admitted position of not just the jeweller but by everybody else. That yes, Rs 50 lakh worth of jewelry has been made for this person, it has been delivered and everything.
In those situations, unexplained expenditure was not being captured. Entries in the books of accounts was not being captured. Entries in the books of accounts—there will be some entries in your name as cash purchases, cash sales or cash receipts, everything could’ve been there but it would not have been captured although these are confirmed not just by the creator of those books of accounts, but by the counterparty also.
Everybody says that, yes, these cash entries are a reflection of the original business but still we had not been capturing them. So, what has been done is not watering down but now we are trying to smoothen the rough edges. Let me assure you, the old provisions stand as they are. We have not expanded one bit.