TDS Provisions on Virtual Digital Assets

In the Union Budget 2022, the government came up with provisions regulating the taxability of investments in Virtual Digital Assets (VDAs), commonly known as cryptocurrencies. One such provision was the introduction of section 194S with effect from 1^stJuly, 2022, which requires the buyer of the VDA to deduct tax at source at 1% of the consideration payable to the seller. Also, CBDT issued certain guidelines considering the difficulties that may arise with complying with the requirements of this section, where the VDAs are transferred through an Exchange. In the below article, we will, one by one, shed light upon the provisions of section 194S and all the related guidelines.

Section 194S

Let us first look at what section 194S says about TDS on payment on transfer of VDAs. So, as per section 194S of the Income Tax Act, any buyer of virtual digital assets is required to deduct one per cent of the consideration payable to any resident for the transfer of such VDAs as Income-tax and deposit the same to the government.

For example: If Mr. Kapoor purchases cryptocurrency for a sum of Rs. 60,000 from Mr. Verma in a financial year, he will have to deduct one per cent of Rs. 60,000, i.e., Rs. 600, as Income-tax and pay the balance of Rs. 59,400 to Mr. Verma.

The section further clarifies that in a case where the consideration for transfer of VDA is -

a) wholly in kind or in exchange of another VDA, or

b) partly in kind and partly in cash but the part in cash is not sufficient to meet the liability of TDS in respect of the whole of such transfer,

the buyer shall, before paying the consideration to the seller, ensure that the tax required to be deducted has been paid to the government in respect of such consideration for the transfer of VDA.

The section also provides situations where the taxpayer is exempted from complying with the provisions of this section. Such cases are:

a) the consideration is payable by a specified person, and the total value of such consideration is up to Rs. 50,000 during the financial year; and

b) the consideration is payable by any person other than a specified person, and the total value of such consideration is up to Rs. 10,000 during the financial year.

So, if a person falls in either of the above categories, he is not required to deduct tax at source under this section.

For example: If Mr. Aman (other than a specified person) buys any Virtual Digital Asset from Mr. Rohan for Rs. 8,000 during FY 2022-23, he will not be required to deduct tax under section 194S as the total value of the consideration payable by Mr. Aman to Mr. Rohan for the VDA does not exceed Rs. 10,000 in the financial year.

On reading the above few lines, you must be thinking about who is a specified person. So, for section 194S, a specified person is an individual or HUF who:

a) does not have any income under the head “Profits and gains from business or profession”, or

b) whose total sales from his business are up to one crore rupees or gross receipts from his profession are up to fifty lakh rupees during the financial year immediately preceding the financial year in which the VDA is transferred.

The next point in the section states that section 194S will override the provisions of section 194O, i.e., if, on a transaction, section 194O, as well as section 194S, both are applicable, then tax shall be deducted on such transaction under section 194S and not u/s 194O. Section 194O deals with TDS on certain sums paid by the e-commerce operator to the e-commerce participant.

Section 194S further mentions that section 203A shall not apply to a specified person. It implies that a specified person will not have to obtain a TAN (Tax Deduction Account Number) for deducting tax under section 194S.

So, this was all about section 194S in itself. Let us now look at the guidelines issued by the government for deducting tax on transferring VDAs through Exchanges in the following portion.

Also Read:Significant Amendments , Income Tax Act in Finance Bill, 2022

Guidelines for TDS on Transfer of VDAs through Exchange

Where VDAs are transferred through an Exchange, usually multiple parties like buyer, seller, Exchange and broker get involved in a single transaction. Consequently, there arises a possibility of tax deduction requirements u/s 194S at different stages that may result in a compliance burden on multiple parties involved in such a transaction.

Hence, to remove the difficulties for transactions taking place on or through an Exchange, the CBDT has issued certain guidelines under the following scenarios:

1) If the transfer of VDA is taking place directly between buyer and seller

The first case is where the transaction occurs directly between buyer and seller and no third party is involved. In this case, the buyer shall be responsible for deducting tax on the consideration payable for the transfer of the VDA if it exceeds the applicable threshold limit under section 194S.

2) If the transfer of VDA happens via an Exchange (VDA is not owned by the Exchange)

It is the second scenario where the transfer of VDA happens through an Exchange, and the Exchange does not own the VDA. In this case, the buyer would credit or make payment to the Exchange. Then the Exchange would be required to credit/make payment to the owner of the Virtual Digital Asset being transferred, either directly or through a broker. Based on the fact that whether a broker is involved in the transaction, this scenario can be understood under the following two categories:

     a) If the Exchange is directly crediting or making payment to the seller

In this case, only the Exchange will be responsible for deducting tax at the time of crediting or transferring payment from the buyer to the seller of the VDA.

     b) If the Exchange is crediting or making payment to the seller through a broker

In this case, where the Exchange credits/makes payment to the seller through a broker, both the broker and the Exchange shall be responsible for deducting tax u/s 194S. However, if there is a written agreement between the broker and the Exchange that the broker would deduct tax on such credit/payment, then the broker alone may deduct the tax under section 194S of the Act.

3 ) If the transfer of VDA happens via Exchange (VDA is owned by the Exchange)

The last case is where the transfer of VDA happens on or through an Exchange, and VDA is also owned by the Exchange. In this situation, as only two parties are involved, the buyer and seller, i.e., Exchange, it will be the responsibility of the buyer of VDA to deduct tax at source. However, it might happen that the buyer does not know whether or not the Exchange owns the VDA being transferred. In such a scenario, the Exchange might enter into a written agreement with the buyer or his broker that the Exchange would pay tax in all such transactions.

A taxpayer buying Virtual Digital Assets can fall under any of the above-discussed scenarios based on the parties involved in the transaction. As the conditions vary in each situation, the taxpayer must understand and comply with the TDS requirements as applicable in his case.

Another point the circular clarified is that, on purchasing VDAs, the tax under section 194S shall be deducted on net consideration after excluding GST.

Also Read: Higher TDS for Income Tax Return Defaulters w.e.f. 01.07.2021-Decoding section 206AB

Depositing and Reporting Requirements of TDS on VDAs

Time Limit for Depositing TDS to the Government

* The time limit to deposit the tax remains the same for section 194S, like any other TDS section. That is, the taxpayer has to deposit the tax deducted under section 194S within seven days from the end of the month in which it is deducted. But, for the tax deducted in March, the taxpayer can deposit it till the following 30^thof April.

* However, this time limit would differ for a specified person under section 194S. A specified person will have to pay the tax deducted on purchasing VDAs to the government within thirty days from the end of the month in which it has been deducted.

For example: If you do not have a business or professional income and deduct tax on purchasing VDAs in September 2022, you will have to pay it to the government by 31^stOctober, 2022.

Reporting of TDS on VDAs to the Government

* After deducting the tax, the buyer will have to file a quarterly statement in Form No. 26Q (TDS Return filed for reporting TDS on any payment other than salary) with the tax department.

* However, in cases where the Exchange pays the tax under section 194S, the Exchange will be liable to furnish a quarterly statement in Form 26QF for all such transactions of the quarter.

* Whereas, on deducting tax u/s 194S, a specified person referred to in section 194S will have to file the challan-cum-statement in Form 26QE within thirty days from the end of the month in which the deduction is made.

* The department has also introduced Form 16E, a certificate of deduction of tax at source that has to be furnished by the specified person to the seller of the digital asset within fifteen days from the due date of filing Form 26QE.

Applicability of Section 194S

The taxpayers must note that though section 194S has become effective from 1^stJuly, 2022, the aggregate value of all the transactions from 1^stApril, 2022 will be added to see if they exceed the applicable threshold limit for the applicability of the TDS provisions u/s 194S for the financial year 2022-23. However, the consideration paid for the transfer of VDA before 1^stJuly, 2022 would not be subjected to TDS under section 194S of the Act.

For example: Suppose you enter into the transactions to purchase cryptocurrencies twice in FY 2022-23: once on 16^thApril, 2022 for Rs. 20,000 and another on 4^thOctober, 2022 for Rs. 40,000. In this case, to determine the applicability of section 194S based on the threshold limit, Rs. 20,000 will be added to Rs. 40,000 and the total amount of Rs. 60,000 will be considered for FY 2022-23. However, you will be liable to deduct tax on the consideration paid for buying cryptocurrencies only on 4^thOctober, 2022, i.e., Rs. 40,000 and not on the entire amount of Rs. 60,000 as the sum of Rs. 20,000 pertains to the first transaction that took place before 1^stJuly, 2022.

Let’s Sum up

The introduction of section 194S is one of the crucial steps of the government toward bringing the dealings involving the transfer of Virtual Digital Assets into the ambit of taxation. The taxpayers should be well-equipped to comprehend and fulfil all the compliances relating to investments in VDAs and maintain the appropriate documentation to support these transactions.

Take control of your tax obligations for Virtual Digital Asset transactions. Understand section 194S and its guidelines to ensure compliance. Stay informed and avoid penalties. Contact us today at info@manishanilgupta.com

Disclaimer: The information given in this article is for general guidance to the readers. This information should not be sought as a substitute for legal opinion