Digital Transformation

New Guidelines for TDS on Virtual Digital Asset and Cryptocurrency-CBDT

During Budget Session 2022-2023, Finance Minister Nirmala Sitharamanhas brought some significant changes on taxability over holding and transaction of Virtual Digital Assets or Crypto Currencies. The Finance Act, 2022, inserted a new section 194S in the Income-tax Act, 1961, with effect from 1st July 2022.

The newly inserted section states any person paying any amount of sum by way of consideration through transfer of Virtual Digital Asset (VDA) or cryptocurrencies beyond Rs. 10,000 in a yearhas to be levied with 1% tax deduction at source (TDS) on such payment as income tax (To be enforced from 1^st July 2022).For specified persons, the permissible limit for tax deduction at source (TDS) would be Rs 50,000 a year; specified persons are defined for this provision, includes individuals/HUFs thatare required to audited their accounts under the Income Tax Act.

The sub-section (6) of section 194S of the Income Tax Act, 1961 authorises the Central Board of Direct Taxes to issue guidelines for the removal of difficulties with respect to Section 194S of the said Act. These guidelines are binding on the person responsible for paying a sum amount as consideration through transfer of Virtual Digital Asset or Cryptocurrency.

CBDT guidelines for TDS on Virtual Digital Asset

Under P2P transactions where buyer and seller are directly involved, the person responsible for paying the consideration (buyer) is required to deduct tax under 194S of the Income Tax Act. However, when the mode of transaction of Virtual Direct Asset through an Exchange, then there is a possibility of deduction at multiple stages. As few days are left for the implementation of newly inserted TDS provisions, clarity over the procedural compliances was much needed. CBDT^[1] has brought some guidelines for detailed disclosure requirements for TDS deduction over the transfer of Virtual Digital Asset where a mode of transaction and date of transfer has to be specified.

Following guidelines for TDS on Virtual Digital Asset or cryptocurrency are stated below:

• An Exchange will have to deduct TDS on Virtual Digital Asset, if mode of transaction is via an exchange.
• Exchange may deduct TDS only when credit or payment to the seller is made by the owner of Virtual digital Asset.
• The amount of consideration being paid to the broker by Exchange, where the broker is a seller, is also subject to the tax deduction under section 194S of the Income Tax Act.
• In a situation where broker is not a seller and doesn’t own the VDA, then it is the responsibility of the both Broker and the Exchange to deduct TDS on Virtual Digital Asset. However, if there is an agreement between the Exchange and broker, then such deduction shall be made by the broker as mentioned under the circular of CBDT.Exchanges are obligated to furnish a quarterly statement cum challan (Form26QF) of all such transactions before the due date.
• The buyer will have to deduct tax on Virtual Digital Asset, if he/she is the owner of VDA and transaction is made via Exchange. However, when there is confusion over the ownership of VDA, Exchange may enter into a written agreement with the buyer or broker with respect to all such transactions. Here also Exchanges are obligated to furnish a quarterly statement cum challan (Form 26QF) of all such transactions before the due date as provided under the Income-tax Act, 1961.
• According to the CBDT circular, if a person is transferring a Virtual Digital Asset to another person in exchange of a different Virtual Digital Asset or in-kind and cash is not sufficient to meet the tax liability, then both buyer and seller will be liable to pay tax and have to disclose the required information about the transaction to other so that VDAs can then be exchanged. However, if such a transaction occurs via Exchange, the Exchange can exercise an alternative mechanism based on written contractual agreements with the buyers/sellers.
• The TDS was levied twice on VDA transfers via Payment Gateways. To deal with this issue, CBDT has clarified that payment gateways are not required to deduct tax under Income Tax Act on transactions where tax has already been deducted under Section 194S.
• TDS collected under Section 194S shall be deposited within 30 days from the end of the month under which deduction was made.
• Since the threshold value of fifty thousand rupees (or ten thousand rupees) is decided for a period of financial year, calculation of consideration for transfer of VDA will trigger the deduction under section 194S of the Act and shall be counted from 1st April, 2022. Hence, if the aggregate value of the consideration for transfer of Virtual Digital Asset payable by a person exceeds Rs. 50,000 (or Rs. 10,000) during the financial year 2022-23 (including the period up to 30th June 2022). Then, Section 194S of the Act shall apply to any sum or consideration for transfer of VDA, credited/paid on or after 1st July 2022.

For the purpose of clarity, the CBDT circular also defines: The term Exchange means any person that operates an application (software) or platform for transaction of VDAs. The term Broker means any person that operates an application (software) or platform for transactions of VDAs and holds a brokerage account with respective Exchange for executing of sale and purchase of Virtual Digital Asset.

Conclusion

These guidelines for deduction of tax at source over the transaction of Virtual Digital Asset or Cryptocurrency or via exchange will significantly help the users for smooth transfer of VADs and cryptocurrencies.

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