Income Tax

TDS under Section 194S of the Income Tax Act

Virtual Digital Assets are assets in the form of Cryptocurrency or Non-fungible assets or any other digital asset notified by the Central Government in the official gazette. Cryptocurrency generally contains information or code or number or token generated via cryptographic means whereas Non-fungible tokens are virtual assets on blockchain having unique identification codes and metadata to distinguish one from another. The Government has neither clarified if the virtual assets will be treated as currency, commodity, or security nor regulated them but the Finance Act of 2022 has introduced a new Tax Deducted at Source (TDS) provision under Section 194S of the Income Tax Act, 1961 to tax such virtual assets. The provision came into effect on 1^st July 2022. Scroll down to check more about TDS under section 194S of the Income Tax Act.

When is TDS under section 194S deducted?

TDS under Section 194S deals with Virtual Digital Assets (VDAs) which include cryptocurrencies & Non-fungible tokens (NFTs). This provision mandates any person responsible for paying a resident any sum by way of consideration for the transfer of any VDA to deduct tax at the rate of 1% of the sum of income tax. The provision applies only to those transactions where the value of a transaction in VDA is more than Rs. 10,000 or Rs. 50,000 for specified persons in a particular year. The TDS is required to be deducted at the time of payment/at the time of credit of the sum to the account of the resident, whichever is earlier. The TDS under section 194S is required to be reported to the government in Form 26Q. Further, the TDS deduction shall be made only if the person receiving the payment is a resident of India.

What happens when the consideration for the transfer of VDA is not in cash?

When the consideration for transfer of the virtual asset is either:

• Wholly in kind or in exchange for another virtual digital asset and no part of it is in cash; or
• Partly in cash or partly in kind but the part in cash is insufficient to meet the liability of deduction of tax in respect of the whole of such transfer;

In such cases, the person responsible for paying such consideration shall ensure before releasing such consideration that the amount of tax required to be deducted has been paid in respect of such consideration for the transfer of VDA.

Who is a ‘specified person’ for the purpose of deducting TDS under section 194S?

TDS under section 194S applies to a specified person when the payment for the transfer of VDA exceeds Rs. 50,000/- during a financial year. Explanation to section 194S states who falls under the category of ‘specified person’. ‘Specified person’ means:

1. An individual/a Hindu Undivided Family (HUF) whose total sales, gross receipts/turnover from the business carried on by him does not exceed Rupees One crore during the financial year immediately preceding the FY in which the Virtual Digital Assets is transferred; and
2. An individual or HUF having professional receipts of not more than Rupees Fifty lakh rupees during the financial year immediately preceding the F.Y. in which the VDA is transferred;
3. An individual or HUF not having any income under the head ‘profits & gains of business or profession’.

Further, sub-section 6 of section 194S authorizes the Central Board of Direct Taxes (CBDT^[1]) to issue guidelines with the prior approval of the Central Government to issue guidelines to remove any difficulty arising while giving effect to the provision of TDS under section 194S. Every guideline so issued by the CBDT shall be laid before each House of Parliament & shall be binding on the income tax authorities & the individual responsible for paying the consideration on transfer of such VDAs.

What are the instances where no tax is deducted?

No TDS under section 194S shall be deducted in the following cases:

• Where the consideration is payable by a specified person and the aggregate value of such consideration does not exceed Rs. 50,000/- during the financial year; or
• Where the consideration is payable by any person except a specified person and the aggregate value of such consideration does not exceed Rs. 10,000/- during the financial year.

Who is responsible to deduct TDS under section 194S on VDAs?

TDS under section 194S is deducted by a person responsible for making the payment on the transfer of the VDA. In a transfer of VDA, the seller is not known to the buyer as the trading takes place over a digital exchange. TDS under section 194S required some clarity therefore, the income tax department issued a circular to clarify the role of the crypto exchanges and the brokers concerning the deduction of TDS on the sale of cryptocurrency and VDAs. The liability to deduct TDS involved different scenarios as discussed below:

• Peer to Peer (P2P) transfer of VDA

In P2P transfer, the primary person responsible to deduct TDS is the buyer. The buyer also has to report the deduction by filing Form 26Q or 26QE.

• The transfer of VDA on or through an Exchange and the VDA is owned by a person other than the Exchange

In this scenario, first the buyer makes payment to the exchange either directly or through a broker so the primary person responsible to deduct TDS is the Exchange and Form 26Q is also filed by the Exchange. Then the payment between the Exchange and the seller is done through a broker. Here the broker is different from the seller and the responsibility to deduct TDS is on Exchange as well as on the Broker. However, for deduction of tax by the broker a written agreement between the Exchange and the Broker has to be in existence which allows the broker to deduct tax on credit/payment.

• Transfer of VDA on or through an Exchange and the VDA is owned by such Exchange

In this scenario, the buyer makes the payment to the Exchange through a broker, then the broker deducts TDS and the tax is paid by the Exchange. For payment of tax by the Exchange, a written agreement between the Exchange and the broker stating that the Exchange shall be liable to pay tax on such credit. In addition to this, the Exchange also files Form 26QF and ITR. However, if the buyer makes the payment directly to the Exchange then the primary person responsible to deduct TDS is the Buyer and the tax may be paid by the Exchange in case there is a written agreement between the Exchange and the Buyer that the Exchange shall pay tax on such credit/payment. Form 26QF and ITR shall also be filed by the Exchange.

• Transfer of VDA where the consideration for the transfer is in kind

Under this scenario, if the transaction is not done through an Exchange then the responsibility to deduct TDS is on the Buyer himself and the buyer will release the consideration in kind after the seller provides the challan. The buyer will also file Form 26Q or 26QE. However, if the transaction is done through an Exchange, then the responsibility to deduct TDS is on the Exchange. Further, the Exchange can exercise Alternate Mechanism (AM) based on the written contractual agreement with the buyers/sellers and deduct tax for both legs of the transactions. The Exchange will also file Form 26Q.

Due Date to deposit TDS under Section 194S

If the amount is credited or the payment is made in March, then the time limit to deposit TDS will be:

• On or before 7th April in case of the Government Deductor; or
• On or before 30^th April in case of any other Deductor.

If the amount is credited or the payment is made in a month other than March, then the time limit to deposit TDS is within 7 days from the end of the month in which the deduction is made.

Issue of TDS Certificate under section 194S

A TDS certificate is issued by the deductor to the deductee under Form 16A for the TDS deducted on the transfer of VDA. The deductee can claim TDS credit in their Income Tax Return. Further, the details of the tax deducted under section 194S can be viewed in Form 26AS on the website of the income tax department.

Filing Return for TDS under section 194S

It is the deductor or the payer who is liable to deduct TDS under section 194S of the Income Tax Act. Therefore, they are also obliged to file quarterly returns under Form 26Q by the last day of the month succeeding the end of the quarter. Therefore, the due dates would be as follows:

• From April to June – the due date for filing the Return is 31^st July.
• From July to September- the due date for filing the Return is 31^st October.
• From October to December – the due date for filing the Return is 31^st January.
• From January to March – the due date for filing the Return is 31^st May.

Conclusion

Transactions of VDAs are increasing day by day. As the name suggests, “virtual digital asset’ transactions take place virtually over multiple computers leaving no physical evidence behind. It becomes important to trace such transactions otherwise such transactions would encourage criminal activity. Therefore, TDS under section 194S was levied on VDAs and cryptocurrencies.

Also Read:
How to file TDS Return?
Section 194-H of the Income Tax Act, 1961
New Guidelines for TDS on Virtual Digital Asset and Cryptocurrency-CBDT