What is DeFi and how it works

DeFi stands for “Decentralized Finance,” and it refers to a set of financial services and applications that are built on decentralized blockchain networks, primarily on the Ethereum platform. Unlike traditional financial systems that rely on intermediaries like banks, brokers, and exchanges, DeFi aims to provide open, permissionless, and inclusive financial services directly to users, without the need for centralized control.

Key components of DeFi:

1. Smart Contracts: DeFi applications are powered by smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. Smart contracts automate financial transactions, removing the need for intermediaries.

2. Decentralized Applications (DApps): These are applications built on blockchain platforms that enable users to access various financial services, such as lending, borrowing, trading, and more. DApps can be accessed through web browsers or mobile apps.

3. Liquidity Pools: DeFi platforms often rely on liquidity pools, which are pools of funds locked into smart contracts. These pools facilitate trading, lending, and borrowing activities by providing liquidity to the platform.

How DeFi works:

1. Decentralized Exchanges (DEXs): DEXs allow users to trade cryptocurrencies directly with one another, without the need for intermediaries. Users can connect their digital wallets to DEXs and execute trades through smart contracts.

2. Lending and Borrowing: DeFi platforms enable users to lend their cryptocurrencies and earn interest or borrow assets by collateralizing their holdings. These processes are governed by smart contracts that automatically execute the terms of the loan.

3. Yield Farming: Yield farming involves providing liquidity to DeFi platforms by depositing funds into liquidity pools. In return, users receive rewards, typically in the form of additional tokens or fees generated by the platform.

4. Stablecoins: Stablecoins are cryptocurrencies pegged to stable assets like fiat currencies (e.g., USD) or commodities. They are widely used in DeFi to mitigate price volatility and facilitate trading and lending activities.

Benefits of DeFi:

1. Accessibility: DeFi opens up financial services to anyone with an internet connection and a digital wallet, regardless of their location or financial status.

2. Transparency: DeFi applications are built on public blockchains, making all transactions and smart contract code visible and auditable.

3. Security: DeFi relies on decentralized networks, reducing the risk of single points of failure and potential security breaches.

4. Financial Inclusion: DeFi can provide financial services to the unbanked and underbanked populations who lack access to traditional banking systems.

Despite its advantages, it’s essential to note that DeFi also comes with risks, including smart contract vulnerabilities, market volatility, and regulatory uncertainties. Users should conduct thorough research and exercise caution when participating in DeFi activities.


Tax on Cryptocurrency as Virtual Digital Assets

In the Union Budget for FY 22-23, the government of India announced provisions related to Taxation of Cryptocurrency as Virtual Digital Assets, earlier to this there was no provisions for taxation of Cryptocurrency and as General practice, most the Taxpayers are declaring their income either as Trading business or if brought as an investment perspective than as Capital Assets, Short Term or Long Term Capital Gain provisions are been followed by many Industry Experts. In this article, we will discuss provisions related to the Taxation of Crypto as Digital Virtual Digital Assets.

Meaning of Virtual Digital Assets

“Virtual Digital Asset” Means––

(A) Any Information Or Code Or Number Or Token (Not Being Indian Currency Or Foreign Currency), Generated Through Cryptographic Means Or Otherwise, By Whatever Name Called, Providing A Digital Representation Of Value Exchanged With Or Without Consideration, With The Promise Or Representation Of Having Inherent Value, Or Functions As A Store Of Value Or A Unit Of Account Including Its Use In Any Financial Transaction Or Investment, But Not Limited To Investment Scheme; And Can Be Transferred, Stored Or Traded Electronically;

 (B) A Non-Fungible Token Or Any Other Token Of Similar Nature, By Whatever Name Called;

(C) Any Other Digital Asset, As The Central Government May, By Notification In The Official Gazette Specify: Provided That The Central Government May, By Notification In The Official Gazette, Exclude Any Digital Asset From The Definition Of Virtual Digital Asset Subject To Such Conditions As May Be Specified Therein

Digital Virtual Assets

Tax on Crypto as Virtual Digital Assets

For Taxation of Virtual Digital Assets new Section 115BBH has been inserted in Income Tax Act

Where the total income of an assessee includes any income from the transfer of any virtual digital
asset, the income-tax payable shall be the aggregate of

(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent and

(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the income referred to in clause (a).

From the above, it is clear that the minimum tax rate shall be thirty percent on any income received from Transfer of Virtual Digital Assets if your rate of tax is below thirty percent or if your rate of tax is more than thirty percent than the higher rate of tax applicable will be the rate of Tax on transfer of Virtual Digital Assets.

Deduction allowed while Calculating Income of Virtual Digital Asset

While calculating income from Virtual Digital Assets deduction in respect to Cost of Acquisition will be allowed and no other deduction will be allowed. Also, Set-off of any loss will not be allowed while calculating income from Virtual Digital Assets.

TDS on payment on Transfer of Virtual Digital Assets

A New Section 194S has been inserted in Income-tax Act for Provisions related to TDS on Virtual Digital Assets

Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one percent. of such sum as income-tax thereon

Further, if there is an exchange of one Virtual Digital Assets for another than the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital assets.

Non Applicability of TDS on specified person

TDS on Crypto is not applicable if the value or aggregate value of such consideration does not exceed fifty thousand rupees and ten thousand rupees for other than specified persons during the financial year.

“specified person” means a person,–– (a) being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of the profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred; (b) being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”

TDS provisions will be applicable from 01st July 2022.