Finance Minister Nirmala Sitharaman clarified in the Rajya Sabha recently that the government's move to levy a 30 per cent tax on gains from transactions in private digital currencies has nothing to do with their legal status. She added that the decision on "banning or not banning" cryptocurrencies will be taken after consultations.
Incomes derived from even illegal activities are liable to tax, as per some current tax provisions and court precedents.
Current Tax Provisions
Income tax provisions for certain activities such as gambling and lottery transactions make them liable for tax.
“For gambling and betting, there is a provision for taxation as per Section 115BB of the Income-tax Act, where winnings from gambling, betting, lotteries and other (such) games are taxed at 30 per cent. This provision is there in the Income-tax Act despite gambling and betting being illegal in most states,” says Jay Sayta, technology lawyer and advisor, Cryptowala.in, a digital news platform.
The Union Budget 2022 proposed to insert Section 115BBH under the Income-tax Act for charging tax on the transfer of virtual digital assets (VDAs). The rate of tax is proposed at 30 per cent on income earned on the transfer of VDA.
Sayta says that even if an activity is deemed illegal, authorities have the right to claim taxation dues on the same. “Whether the activity is legal or illegal will be decided by a separate legislation which the government can introduce in the future. Probably, the government is trying to assess the data on the revenue potential and tax generation capability of this industry before taking a decision on banning or regulating the industry,” he added.
Court Precedents
Various court judgments also show that taxability of gains is not related to the legality of an instrument or asset.
For example, in a case where a trader entered forward contracts that were prohibited by law and made profits, the Gujarat High Court held that even where a trade is illegal, it would still be a trade within the meaning of the Income-tax Act (CIT vs. SC Kothari, 1968).
In this landmark decision, the high court specifically noted, “The assessee cannot be heard to say that the profits from the trade carried on by him are not assessable because the trade is illegal. To permit any such contention to prevail would be to put a premium on dishonesty.”
International Practice
Even internationally, taxation doesn’t really depend on the legality of an asset or instrument.
“Even as per the United States’ federal income tax rules, the person’s income will be taxable regardless of the fact whether the income is obtained legally or illegally,” says Amit Jindal, partner of Felix Advisory, PMG of Apiary (Blockchain COE), STPI (government of India).
The move to levy steep taxation is being seen as a step to discourage investors from putting their money into something they may not understand. “Levying 30% tax on the income from cryptocurrencies will discourage investors and is also likely to reduce the total amount already invested by Indians in different cryptocurrencies. Till Parliament passes the cryptocurrency Bill, this stringent tax liability will ensure that citizens don’t take excessive exposure to this investment class,” says Purushottam Anand, advocate and founder of Crypto Legal, a blockchain law firm.
