The Budget proposal to levy 30 percent tax on the income from virtual digital assets, including cryptocurrencies must not be construed as the government’s regulatory approval to them, the Central Board of Direct Taxes chairman J.B. Mohapatra said in an interview, adding that the latest provision of tax deducted at source (TDS) on such transactions would help in tracking their reach in system.

“Just because an item is getting taxed does not ipso facto make it legal,” Mohapatra said a day after the budget, responding to arguments that because it will now levy a tax on crypto assets, the government has, in effect, recognised them. Currently, cryptocurrencies are unregulated in India.

Finance minister Nirmala Sitharaman in her budget speech on Tuesday said there has been a “phenomenal increase” in transactions in virtual digital assets. “The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent,” she added.

Explaining the fineprint of budget later that day she explained the intent of the proposal: “Every individual cannot be minting currency. Is it not illicit? When illicit currency is coming in this country, don’t we catch then? So, currency cannot be issued by everybody… It has to be driven by the central bank of the country. And what we announced today is, the Reserve Bank of India [RBI] will come up with the digital currency. That’s one thing. Now, outside of which [digital] assets are sold, value is created, nothing stops me from taxing them.”

CBDT chairman said the 30% “crypto tax under special provisions of 115BBH… will help us in finding out the true status of that particular sector… With regard to TDS on crypto transactions that will give us an idea of penetration of the market across investors… that how deep and how expansive is this business.” The move will help to track the quantum of crypto business generated.

The finance minister on Tuesday announced TDS on transactions of crypto assets. “Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold,” she said in her Budget speech.

Mohapatra said that the move would help the government agencies to check possible illegal activities, including money laundering and drug trade through cryptocurrencies. “What I’m saying is that because of the general knowledge about the sector and lack of transparency… that the new TDS provision would help us in finding out the source of the investments in crypto assets… Whether transactions have been made with right people… whether profits have been declared in the right quantum,” he said.

L Badri Narayanan, executive partner, Lakshmikumaran & Sridharan Attorneys said: “The recognition of digital assets under income tax is not akin to granting legal status.”

“The new crypto tax seems to be deterrent to the interest of the investors and lot similar to taxation on gambling. With a view to monitor crypto transactions, a TDS @ 1% shall be levied on the discharge of consideration at the time of transfer of virtual digital asset. The bill also provides for taxation on gift of virtual digital assets in the hands of the recipient. This will have additional challenges in the operation of global crypto exchanges and privacy concerns for individuals,” he said.