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Explained: TDS on transfer of virtual digital assets, applicable from July 1 — what the guidelines say

The Finance Act, 2022 introduced Section 194S in The Income Tax Act, 1961, under which a TDS of 1 per cent will be levied on the transfer of VDAs effective July 1 if the value of transactions exceeds Rs 10,000 in a year.

Written by Pranav Mukul , Aanchal Magazine , Edited by Explained Desk | New Delhi |
June 23, 2022 3:51:56 pm
The CBDT has defined four primary VDAs — bitcoin, ether, USD Tether, and USD Coin — for the purpose of tax deduction on lesser known cryptocurrencies. (Reuters/File)

The Central Board of Direct Taxes (CBDT) on Wednesday (June 22) issued detailed guidelines on the tax deducted at source (TDS) rule for virtual digital assets (VDAs) such as cryptocurrencies, and laid down the various scenarios under which tax would be applicable and on whom the onus of deduction would lie.

The Finance Act, 2022 introduced Section 194S in The Income Tax Act, 1961, under which a TDS of 1 per cent will be levied on the transfer of VDAs effective July 1 if the value of transactions exceeds Rs 10,000 in a year.

On whom does the onus to pay TDS on crypto lie?

In the guidelines, the Tax Department has defined the responsibilities of deducting the tax in various scenarios.
For example, in cases where the transfer of VDA takes place on or through an exchange, and the VDA being transferred is not owned by the exchange, tax may be deducted by the exchange making the payment to the seller.

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However, when the payment between the seller and the exchange is being done through a broker, the responsibility to deduct tax shall be on both the exchange and the broker.

In cases where transfer of VDA takes place on or through an exchange, and the VDA being transferred is owned by this exchange, the primary responsibility to deduct tax remains with the buyer or his broker.

However, as an alternative, the exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the exchange would be paying the tax on or before the due date for that quarter.

This mainly deals with situations where the transfer of a VDA is being made against money. The tax department has also given examples of cases where the transfer of VDA happens in exchange for another VDA.

For example, if two different crypto currencies — say, bitcoin and ether — are being exchanged, both the persons would be considered buyers as well as sellers. Therefore, both will need to pay tax with respect to the transfer of cryptocurrency.
The guidelines also allow the exchanges that are facilitating such transactions to deduct tax in these cases.

How will TDS be levied if the transfer of VDA is in kind, through an exchange or broker?

Where VDA is transferred for consideration in kind, or partly in cash and partly in kind, through an exchange, tax may be deducted by the exchange. This alternative approach can be exercised based on a written agreement between the exchange and the buyers/ sellers. The exchange would be required to deduct tax on both legs of the transaction (buyers/ sellers) and report it as such.

How has taxation been defined in case of transfer of VDAs in kind?

The CBDT has defined four primary VDAs — bitcoin, ether, USD Tether, and USD Coin — for the purpose of tax deduction on lesser known cryptocurrencies.

“For example, in case of trade for Monero to Deso…the exchanges shall immediately execute a market order for converting this tax deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will ensure that the tax deducted under Section 194S of the Act in the form of non-primary VDAs like Deso/ Monero is converted to an equivalent of primary VDAs which have a ready INR market,” it has said.

What have tax experts said on the VDA guidelines?

AKM Global Tax Partner Amit Maheshwari said: “Broadly, the responsibility to deduct TDS has been put on the exchanges which will increase the regulatory and compliance burden for them… The exchanges have to further disclose these transactions in their tax return and maintain a proper trail. However, this would be helpful to the buyers and sellers both since they can enter into contracts with the exchange for passing the responsibility to deduct tax on their behalf in VDA to VDA transfers or otherwise as well.”

Gopal Bohra, Partner, N A Shah Associates, said: “If the buyer is acquiring VDA through exchange and making payment to exchange, exchange will deduct TDS while making payment to the owner of VDA or broker of the VDA owner, or even when exchange itself is the owner of the VDA, buyer can enter into written agreement with exchange wherein exchange will be paying taxes on such transaction.

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“Similarly, where one VDA is exchanged through another VDA, the exchange will deduct TDS @1% on both parties as in this case, both the parties are buyers of another VDA in lieu of transfer of the VDA owned by them. Thus, the clarification provided by CBDT will ease out much of the compliance on the part of the buyer of the VDA. However, the buyer will be required to comply with this provision if he is acquiring the VDA directly from the owner or broker without involvement of the exchange.”

Neeraj Agarwala, Partner, Nangia Andersen LLP, said: “Overall, the CBDT has successfully clarified several open issues which were being debated in the professional circles. However, several of the recommendations made by the CBDT, especially with regard to the documents required to be maintained between the transacting parties, for example agreement, challans, undertakings etc., may not be practical, and hence may result in several clarifications issued under this circular being made redundant.”

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