Q2. What is it actually this tax on digital assets mean in current budget? Can anyone help me with brief details?
The government has an idea for raising new revenue and have put it as a placeholder in its budget until authorizing legislation for the new tax is in place. But it wasn't a law yet, as of February 3, 2022.
Frequently, final tax legislation differs greatly from the originally proposed tax legislation in most details relevant to a taxpayer. The proposed tax legislation is subject to amendment in the legislative process before it becomes law (although there may be more recent developments of which I am not currently aware at some point). It will probably take many months to pass a law enacting such a tax, if it happens at all.
The proposed tax is discussed at this CNBC story from February 3, 2022. The summary available at this link, which is probably based upon a press release of the government, rather than its proposed legislative language, is as follows:
India’s proposed tax rate on income from virtual assets is steep, but it signals that the government recognizes the country’s cryptocurrency industry, the CEO of crypto exchange CoinSwitch told CNBC.
In the Feb. 1 annual budget, Finance Minister Nirmala Sitharaman proposed a 30% tax on any income from the transfer of digital assets and said no deductions would be allowed.
Losses incurred from such transactions could not be set off against any other income.
India also planned to impose a 1% tax deducted at source, or TDS, on payments related to the transfer of digital assets.
Basically, this is a capital gains tax on cryptocurrencies and non-fungible tokens (NFTs), but with no deductions for cryptocurrency/NFT losses against income other than cryptocurrency/NFT income, together with a 1% sales tax on cryptocurrency/NFT transaction payments.
Example One
You buy 800,000 rupees of Bitcoin and 200,000 rupees of limited edition online trading cards for celebrities like cricket players, Bollywood stars, famous pop singers, businessman, politicians, mathematicians, scientists and historical generals (which are non-fungible tokens) on January 1, 2023, then on December 31, 2023, you sell the Bitcoin for 400,000 rupees and all of your NFTs for 1,200,000 because you get in a bidding war with Mukesh Ambani over his own NFTs.
You have a 400,000 rupee loss on the Bitcoin which reduces your 1,000,000 rupee gain on NFTs, for net digital asset income of 600,000 rupees, giving rise to a 180,000 rupee digital assets income tax.
In addition, you would pay a 10000 rupee digital asset transaction tax (1%) on the purchase and a 14000 digital asset transaction tax on the sale for a total digital asset tax of 204,000 rupees
Note that it isn't entirely clear from the available information if the transaction tax on digital asset payments is owed by both the seller and the buyer, by only the seller, by only the buyer, or half by each. These examples assume that the 1% transaction tax applies to both the seller and to the buyer, but this might end up being different in the final adopted legislation.
After the digital assets tax, you would have 1,396,000 rupees left over from your starting investment of 1,000,000 rupees. Good job! You can afford a wild and crazy party with your friends from your profits.
Example Two
But, suppose you only bought the Bitcoin, and not the NFTs, and had a loss of 400,000 rupees, but also had 1,000,000 rupees of salary income from you job as an architect that year.
You wouldn't have any digital asset income tax, but your digital asset transaction tax would be 12,000 rupees, even though you made a loss (subject to the lack of clarity in how the transaction tax works). You wouldn't be able to apply your Bitcoin losses to the taxes you owe on your ordinary income from your salary, however.
For example if X person purchases software say MySQL commercial edition from YZX private limited and YZX Pvt ltd purchased MySQL commercial edition from oracle itself will this new 30% tax be applied on this transaction or not?
So it will look:
--> Oracle (produces MySql COmercial Edition) --> sold to a distributor --> sold to YZX Pvt ltd --> End user say X person
Now:
Q1. Will it be applicable for such software products also?
This tax is not intended to apply to software sales and sales of digital services. The new tax law will probably have an exemption from the digital assets tax for software and will probably treat software the same way that it does now under India's tax laws.
Even if it did apply to software, however (and the details may change in the legislative process) it would only be a 30% tax on the profits YZX Pvt ltd made from selling the software to a retail purchaser, not a tax on the gross sale price of the softwware, although there might be a 1% sales tax on the gross sale price if the tax were expanded from the current proposal to include software.