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Tax withholding on virtual digital assets

The Budget also introduced a new provision, section 194S in the Income Tax Act, 1961 (ITA) that provides a 1% TDS, to be deducted by the payer of the consideration on transfer of such assets, exceeding the specified thresholds, effective 1 July 2022 (Photo: Reuters)Premium
The Budget also introduced a new provision, section 194S in the Income Tax Act, 1961 (ITA) that provides a 1% TDS, to be deducted by the payer of the consideration on transfer of such assets, exceeding the specified thresholds, effective 1 July 2022 (Photo: Reuters)

Budget 2022 introduced a new tax regime for Virtual Digital Assets (VDAs) that taxes the gains from the transfer of such assets at 30% (plus applicable surcharge and cess) starting financial year (FY) 2022-2023.

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The Finance Minister created a stir in Budget 2022 by introducing taxation on Virtual Digital Assets (VDA) such as cryptocurrencies and non-fungible tokens. The provisions introduced a new tax regime for VDAs that taxes the gains from the transfer of such assets at 30% (plus applicable surcharge and cess) starting financial year (FY) 2022-2023. The Budget also introduced a new provision, section 194S in the Income Tax Act, 1961 (ITA) that provides a 1% tax deducted at source (TDS), to be deducted by the payer of the consideration on transfer of such assets, exceeding the specified thresholds, effective 1 July 2022.

Accordingly, with effect from 1 July 2022, any person responsible for paying to a resident, any consideration for transfer of VDA, shall deduct 1% of such consideration as income tax. Tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier. However, no tax withholding is required if the aggregate consideration does not exceed INR 10,000 during the FY. Where consideration is payable by a ‘specified person’ the threshold increases to INR 50,000 instead of INR 10,000. Specified person here means an individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession" in the FY preceding the FY in which the VDA is transferred. Where the individual or HUF does have income under the head “profits and gains of business or profession" in the preceding FY, he will still be regarded as a specified person if his total sales/gross receipts/turnover from business carried on by him does not exceed INR 1 crore or in case of profession, it does not exceed INR 50 lakh. 

There was significant ambiguity on the process of tax withholding on the transfer of VDA. The Central Board of Direct Taxes (CBDT) has issued guidelines in this regard through its Circulars dated 22 June 2022 and 28 June 2022, bringing the much-needed clarity. 

These Circulars have taken cognisance of the fact that in a transaction that takes place on an exchange there is a possibility of TDS requirement for VDA to be triggered at multiple stages. Hence, to remove difficulties, it has clarified the following as regards transactions that take place on or thorough an exchange:

  • Where the VDA is not owned by the exchange but the payment to the seller is made by the exchange directly, tax may be deducted only by the exchange.
  • Where the payment to the seller by the exchange is through a broker, both the exchange and the broker shall deduct tax unless it has been agreed between the exchange and the broker that the broker shall deduct tax on such credit/payment in which case, the broker alone may deduct tax.
  • Where the VDA is owned by the exchange, the primary responsibility to deduct tax, remains with the buyer or his broker. Alternatively, the exchange may enter into a written agreement with the buyer or his broker that the exchange would pay the tax on or before the due date for that quarter. 
  • There could be situations where the consideration is in kind or in exchange of another VDA or partly in kind, and cash is not sufficient to meet the TDS liability. The person responsible for paying such consideration is required to ensure that tax required to be deducted, has been paid in respect of such consideration, before releasing the consideration. Hence, the buyer should release the consideration in kind only after the seller provides proof of payment of such tax (e.g., challan details, etc.). Alternatively, tax may be deducted by the exchange based on written agreement with the buyer /  sller for both aspects of the transactions. 

The circulars have further clarified that:

  • Once tax is deducted under section 194S of the ITA, no tax withholding will be required under section 194Q of the ITA. 
  • TDS under this section shall be on the “net" consideration after excluding GST/charges levied by the deductor for rendering service.
  • In transactions where payment is being carried out through payment gateways the payment gateway will not be required to deduct tax under section 194S of the ITA if tax has already been deducted by the person responsible for such deduction.
  • Though this section comes into effect from 1 July 2022, calculation of consideration for transfer of VDA triggering deduction under section 194S of the ITA shall be counted from 1 April 2022. Hence, if the value or aggregate value of consideration for transfer of VDA payable by a person exceeds INR 50,000 (or INR 10,000) during the FY 2022-2023 (including the period up to 30 June 2022), section 194S of the ITA shall apply on any consideration for transfer of VDA, credited or paid on or after 1 July 2022.The consideration for transfer of VDA which has been credited or paid before 1 July 2022 would not be subjected to TDS.

While the requirement to deduct TDS on transfer of VDAs will ensure better tax compliance and reporting as regards VDA transactions, the new Circulars provide some clarity to taxpayers on the tax withholding provisions for VDA. However, only time will tell whether all the challenges of the taxpayers are addressed.

Aarti Raote is a Partner with Deloitte India. Mousami Nagarsenkar is a Director with Deloitte Haskins & Sells LLP.

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