Raghav Chadha asks Centre to legalise VDAs: What it means, why it matters | Cryptocurrency
Aam Aadmi Party (AAP) MP Raghav Chadha on Tuesday urged the government to legalize virtual digital assets (VDAs) such as cryptocurrency, stablecoins and tokenized assets in India to keep talent, innovation and funds within the country.
“India taxes VDAs as if they were legal. But it regulates them as if they were illegal,” Chadha said in the Rajya Sabha. The AAP leader highlighted that the government taxes VDAs with 30 per cent capital gains tax but offers no legal recognition, investor protection and special anti-money laundering (AML) framework.
Here’s a look at what VDAs are, how they are taxed, and what laws govern them in India and other countries.
What are virtual digital assets?
VDA is a type of asset that is owned in digital form and recorded on a blockchain. Blockchain technology helps prove that the asset is real and who owns it. Most of these assets are immutable; This means they are unique and cannot be replaced with anything else. Therefore, it can be bought, sold or transferred to another person.
In the Union Budget 2022-23, the government has clearly defined VDAs such as cryptocurrencies and NFTs under the Income Tax Act for the first time. However, mobile app subscriptions, e-commerce purchases, OTT platform subscriptions, regular digital currency and Central Bank Digital Currency (CBDC) were excluded.
How are VDAs taxed in India?
Under Section 115BBH of the Finance Act, 2022, if a person derives income from the sale or transfer of VDA, that income is taxed at a flat rate of 30 per cent. This tax is collected separately. The remainder of the person’s income is then taxed under regular income tax rules.
While calculating profit from VDAs, no deduction is allowed for any expenses other than the purchase cost of the asset. Apart from this, no expenses, allowances or damages can be claimed. If a person makes a loss on the sale of VDA, that loss cannot be adjusted against any other income. Additionally, it cannot be transferred to future years.
Additionally, 1 Percent Tax Deducted at Source (TDS) must be deducted from the total value of the TDA transaction. This applies regardless of whether the payment is made in cash or in kind.
Laws governing VDAs in India
Cryptocurrencies and other VDAs are not legal tender in India. This means that they cannot be used as fiat money for payments. However, it is legal to buy, sell and hold these assets.
Replying to a question in the Lok Sabha in July last year, Minister of State in the Ministry of Finance Pankaj Chaudhary said that the crypto asset sector, including NFTs, is currently not regulated in India.
However, VDAs are brought under the purview of the Prevention of Money Laundering Act, 2002 (PMLA). This means that transactions involving VDAs must comply with anti-money laundering rules. The Minister said some aspects of the VDA sector are also subject to the Information Technology Act 2000.
Additionally, companies holding crypto assets are required to disclose these assets in their financial statements. This rule was incorporated by amendment to Schedule III of the Companies Act 2013 by notification dated 24 March 2021 and came into force from 1 April 2021.
How do other countries treat VDAs?
While India maintains a cautious approach towards VDAs, progressive policies are being implemented in many other countries such as Japan and South Korea. Here’s how different countries approach VDAs and crypto:
Japan: It treats cryptocurrencies as legal property under the Payment Services Act. Cryptocurrency exchanges must register with the Financial Services Agency (FSA) and comply with strict rules regarding custody, reserves and consumer protection. The government has also considered tax reforms to support crypto businesses while keeping investor protections in place.
South Korea: It requires crypto exchanges and virtual asset service providers to register with the Korean Financial Intelligence Unit (KFIU) under the Financial Services Commission. The Law on the Protection of Users of Virtual Assets established official rules and consumer protection measures.
United States: The US does not have a single crypto law. Instead, existing regulators such as the SEC and CFTC oversee different parts of the market. The SEC has filed lawsuits against major crypto companies such as Ripple, Coinbase, and Binance.
Chinese: China has one of the strictest approaches to crypto. The People’s Bank of China has banned crypto-related business activities, citing financial risks. Bitcoin mining is banned in 2021 and cryptocurrency trading is also banned. Rather than allowing private cryptocurrencies, China is promoting its own central bank digital currency, the digital yuan (e-CNY), as a government-controlled alternative.
How does lack of regulation affect India?
Chadha said the lack of clear regulation has pushed nearly 120 million Indians to invest through overseas platforms. As a result, around €4.8 trillion of VDA trading has moved out of India, 73 percent of the country’s crypto trading volume now occurs on foreign exchanges, and around 180 Indian crypto startups have shifted abroad.
He said the solution is to ensure compliance in India and give clear recognition to VDAs as an asset class. He said a well-defined domestic regulatory sandbox, backed by strong AML measures, could bring trading activities back to India, protect investors, improve compliance and generate an estimated annual tax revenue of ₹15,000-20,000 crore.
