MPSC 2022 Prelims Paper-I · Question 77 of 100

Correct — option (3), 30% tax plus cess. In the Union Budget for 2022-23, presented on 1 February 2022, the Finance Minister Nirmala Sitharaman announced that income from the transfer of any virtual digital asset would be taxed at a flat rate of thirty per cent, with surcharge and cess payable on top in the usual way. The provision enacted for the purpose is section 115BBH of the Income-tax Act, inserted by the Finance Act, 2022 and effective from 1 April 2022, and its terms are as important as the headline rate. Three restrictions are built into it. No deduction is allowed in computing the income except the cost of acquisition, so expenses incurred in acquiring or holding the asset — infrastructure, electricity, interest on borrowings — cannot be set against the gain. Loss arising from the transfer of a virtual digital asset cannot be set off against income computed under any other provision of the Act. And where a virtual digital asset is received as a gift, it is taxed in the hands of the recipient. A companion provision, section 194S, requires the deduction of tax at source at one per cent on payment made for the transfer of a virtual digital asset, with a threshold of fifty thousand rupees a year for specified persons and ten thousand rupees otherwise, and it took effect from 1 July 2022; its purpose is less to collect revenue than to create a transaction trail, since the tax authority had no visibility into a market conducted on private exchanges. The term virtual digital asset was itself defined for the first time and covers cryptocurrencies, other virtual currencies and non-fungible tokens. Two points of interpretation are worth carrying because they are examined. First, taxing an activity is not the same as legalising it — the government was explicit that the levy did not confer legal status on private cryptocurrencies, and the same Budget announced that the Reserve Bank of India would introduce a Digital Rupee, a central bank digital currency, which is a sovereign instrument and quite different from a private crypto asset. Second, the thirty per cent is a flat rate and not a slab rate, so it applies to the whole of the gain whatever the taxpayer's other income, and a person whose total income falls below the exemption limit still pays thirty per cent on a gain from a virtual digital asset. The answer to be marked is option (3).

• (1)20% tax plus cess — Twenty per cent is not the rate announced, and it is worth understanding why a rate at that level would have defeated the purpose of the provision. Thirty per cent is the highest slab rate applicable to an individual taxpayer's ordinary income, and setting the rate on virtual digital assets at that level ensured that no taxpayer could gain by routing income through such assets rather than earning it in an ordinary form; a rate of twenty per cent would have made the crypto market a tax shelter for anyone in the top slab, which is the opposite of what the government intended. The design of the section confirms the intention, because it is unusually restrictive in every other respect as well — no deduction beyond the cost of acquisition, no set-off of loss against income under any other provision, and tax deducted at source on the transaction itself. Reading a tax measure for its design rather than only for its number is a habit that pays in this section of the paper, because it lets a candidate reconstruct a rate he has forgotten from the purpose the measure was meant to serve.
• (2)25% tax plus cess — Twenty-five per cent is not the rate, and it is the most plausible-looking of the wrong numbers because it sits between the top individual slab rate and nothing in particular; that is exactly what makes it a useful distractor, since a candidate who half-remembers a high rate may settle on it. The announced rate was thirty per cent, plus surcharge and cess, under section 115BBH. What is worth attaching to the number is the accompanying rate that candidates most often confuse with it: the one per cent deducted at source under section 194S on payment for the transfer of a virtual digital asset, with a threshold of fifty thousand rupees a year for specified persons and ten thousand rupees otherwise, in force from 1 July 2022. Those are two different levies doing two different jobs — thirty per cent is the tax on the gain, one per cent is a withholding on the transaction designed to make the market visible to the tax authority — and a question can be set on either, so both belong in a candidate's notes with their sections named.
• (4)35% tax plus cess — Thirty-five per cent is above the top slab rate applicable to an individual's ordinary income under the Income-tax Act, and no rate of that level was announced for virtual digital assets. The option is placed here to catch a candidate who reasons that the government wished to discourage the crypto market and therefore chose a punitive figure. The reasoning is half right and leads to the wrong number: the measure was certainly restrictive, but the restriction was achieved through the design of section 115BBH — the denial of every deduction except the cost of acquisition, the bar on setting off a loss against income under any other provision, and the taxation of a gifted asset in the hands of the recipient — rather than through a rate higher than the top slab. Note also that the printed options all read tax plus cess, so the distinction between them lies entirely in the number; when three of four options differ only in a figure, the question is testing recall of that figure and nothing else, and there is no reasoning available beyond knowing it or reconstructing it from the design.

Until 2022 the Income-tax Act said nothing about cryptocurrencies, and the treatment of gains from them was uncertain — whether they were capital assets, whether trading in them was a business, and how losses were to be handled were all open questions. The Union Budget for 2022-23, presented on 1 February 2022, closed the gap by creating a distinct regime. It defined the term virtual digital asset for the first time, covering cryptocurrencies, other virtual currencies and non-fungible tokens, and it inserted section 115BBH into the Income-tax Act with effect from 1 April 2022, taxing income from the transfer of any such asset at a flat thirty per cent plus surcharge and cess. The regime is deliberately austere: no deduction is allowed except the cost of acquisition; a loss on the transfer of a virtual digital asset cannot be set off against income computed under any other provision; and an asset received as a gift is taxed in the recipient's hands. A separate provision, section 194S, requires one per cent to be deducted at source on payment for the transfer of such an asset from 1 July 2022, with thresholds of fifty thousand rupees a year for specified persons and ten thousand rupees otherwise, its object being to give the tax administration a record of a market that had until then been invisible to it. The government took care to say that the levy did not amount to recognition of private cryptocurrencies as legal tender or as a legitimate instrument, and the same Budget announced that the Reserve Bank of India would introduce a Digital Rupee, a central bank digital currency issued by the sovereign — a very different thing from a privately issued crypto asset, being a liability of the central bank rather than a claim on nobody.

The Union Budget is the single most reliably examined document in the current affairs section of an MPSC paper, and the questions set on it are almost always about a number: a rate, a threshold, an allocation or a target. This is one of those, and its four options differ in nothing but the figure, so the question tests recall and offers no route around it except reconstruction from design. That reconstruction is nonetheless worth practising, because it works more often than candidates expect. Ask what the measure was for. The government wished to bring an untaxed and unmonitored market within the tax net without conferring legitimacy on it, and to remove any incentive to convert ordinary income into crypto gains; the rate that achieves the second aim is the top individual slab rate, which is thirty per cent, and any lower rate would have created the very shelter the measure was meant to close. Beyond the arithmetic, the useful discipline for Budget preparation is to record for each announcement three things — the number, the instrument through which it operates, and the date from which it applies — since a question may ask for any of them and the last is the one candidates most often omit. For this measure the three are thirty per cent, section 115BBH of the Income-tax Act, and 1 April 2022, with the companion one per cent under section 194S from 1 July 2022.

• The Union Budget for 2022-23, presented on 1 February 2022 by Nirmala Sitharaman, taxed income from the transfer of virtual digital assets at a flat thirty per cent plus surcharge and cess, through section 115BBH of the Income-tax Act, with effect from 1 April 2022.
• No deduction is allowed in computing that income except the cost of acquisition, and a loss on the transfer of a virtual digital asset cannot be set off against income computed under any other provision of the Act.
• A virtual digital asset received as a gift is taxed in the hands of the recipient, and the term itself was defined for the first time to cover cryptocurrencies, other virtual currencies and non-fungible tokens.
• Section 194S requires one per cent to be deducted at source on payment for the transfer of a virtual digital asset from 1 July 2022, with thresholds of fifty thousand rupees a year for specified persons and ten thousand rupees otherwise, its purpose being to create a transaction trail.
• The same Budget announced that the Reserve Bank of India would introduce a Digital Rupee, a central bank digital currency; taxing private crypto assets did not confer legal status on them, and the two instruments are quite distinct.

• Confusing the thirty per cent tax on the gain under section 115BBH with the one per cent deducted at source on the transaction under section 194S; both are examinable and they do different jobs
• Assuming that a flat thirty per cent applies only to taxpayers already in the top slab; it applies to the whole gain whatever the taxpayer's other income, so it can exceed the rate the same person pays on salary
• Treating the tax as legalisation; the government was explicit that taxing virtual digital assets did not confer legal status on them
• Confusing the Digital Rupee, a central bank digital currency issued by the Reserve Bank, with a privately issued cryptocurrency; the two were announced in the same Budget and are opposites in character

The Union Budget generates several questions in every MPSC paper, and the great majority of them ask for a number: a tax rate, an exemption threshold, an allocation to a named scheme, a fiscal deficit target, or a disinvestment figure. The remainder ask which instrument gives effect to an announcement, or from what date it operates. Preparation should therefore be a table rather than a reading of the Budget speech, with a row for each announcement and columns for the number, the instrument and the effective date. Two further habits raise accuracy. First, learn the number together with what it replaced, because a question sometimes asks what the rate was before the change. Second, keep the flagship announcements of the year separate from the routine ones, since an examiner writing six months after the Budget will reach for whatever was on the front pages — in 2022 that was the crypto levy and the Digital Rupee, and both were widely predicted to appear in the year's papers.

No directly related past PYQ was found.

• practice — not a real PYQ

  Which section of the Income-tax Act, inserted by the Finance Act 2022, taxes income from the transfer of virtual digital assets ?

  • (a)Section 80C
  • (b)Section 115BBH
  • (c)Section 194S
  • (d)Section 139

  Answer(b) Section 115BBH. It taxes income from the transfer of any virtual digital asset at a flat thirty per cent plus surcharge and cess with effect from 1 April 2022, allows no deduction except the cost of acquisition, and bars the set-off of a loss on such a transfer against income computed under any other provision. Section 194S is the companion provision requiring one per cent to be deducted at source on payment for such a transfer from 1 July 2022, section 80C provides deductions for specified investments, and section 139 deals with the filing of returns.

• practice — not a real PYQ

  The Digital Rupee announced in the Union Budget 2022-23 is best described as which of the following ?

  • (a)A privately issued cryptocurrency approved for use in India
  • (b)A central bank digital currency to be issued by the Reserve Bank of India
  • (c)A digital wallet operated by public sector banks
  • (d)A stablecoin backed by government securities and issued by exchanges

  Answer(b) A central bank digital currency to be issued by the Reserve Bank of India. It is a sovereign instrument, a liability of the central bank in digital form, and is therefore the opposite in character to a privately issued cryptocurrency, which is nobody's liability. The same Budget taxed income from the transfer of virtual digital assets at thirty per cent, and the government was explicit that taxing such assets did not confer legal status on them.