The Central Board of Direct Taxes (CBDT) issued a circular on June 22, 2022 explaining how the tax will be deducted on the transfer of virtual digital assets (VDA) and crypto currencies. The new rules of TDS on VDA and crypto will come into effect from July 1, 2022.

WHAT DOES THE LAW ON TDS ON VDA, CRYPTO SAY?

As per the new law, the purchaser of virtual digital assets (VDA) is required to deduct 1% of the amount paid to the seller (resident Indian) as income tax deducted at source (TDS). The tax is required to be deducted at the time of credit of the amount or at the time of payment to the resident individual, whichever is earlier. The tax will be deducted only if the amount paid exceeds the specified limit, stated CBDT.

Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, "Effective from July 1, 2022, any person (resident individual, non-resident individual or Exchange) making payment to the resident individual at the time of buying crypto, VDA or NFT (as notified by the govt), will be required to deduct TDS on the amount paid at the rate of 1%. The TDS on VDA will be applicable under section 194S of the Income-tax Act, 1961."

If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against the normal rate of 1%) if the payer is not a specified person.

WHEN WILL TDS ON VDA AND CRYPTO APPLICABLE?

As per the circular issued by CBDT, the TDS on the transfer of VDA and crypto will be applicable if:

a) If the amount paid (single or on an aggregate basis) by the 'specified person' (buyer) exceeds Rs 50,000 during the financial year; or

b) The amount paid (single or on an aggregate basis) by any other person/buyer (other than the 'specified person' as mentioned above) exceeds Rs 10,000 during the financial year.

WHO IS A "SPECIFIED PERSON"?

a) An individual or Hindu Undivided Family (HUF) who does not have any income under the head 'profit and gains from business and profession' and

b) An individual or HUF having income under the head 'profit and gains from business and profession' whose total sales/gross receipts/turnover from business does not exceed Rs 1 crore or in the case of the profession does not exceed Rs 50 lakh. This threshold is to be seen in the financial year immediately preceding the financial year in which VDA is transferred.

Wadhwa says, "An individual (not having income from business and profession) will be required to deduct tax at the time of buying VDA, crypto if the payment exceeds Rs 50,000. An individual (having income from a business profession) will be required to deduct TDS if the turnover of business or profession in the previous financial year exceeds Rs 1 crore or Rs 50 lakh respectively. The tax will be deducted if the payment made at the time of buying VDA exceeds Rs 50,000. Any other person (for example Company) will deduct TDS at the time of buying VDA, crypto if the payment exceeds Rs 10,000."

Do note that tax has to be deducted from the amount paid after excluding GST and any other charges levied. Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India says, "It has been clarified that where tax is deducted under the VDA provisions no tax shall be required to be deducted considering the provisions regarding the purchase of goods (without getting into the aspect whether VDAs are goods or not). The tax is to be deducted only on the net amount excluding the charges and GST."

EXAMPLE OF HOW TDS ON VDA, CRYPTO WILL BE APPLICABLE AT THE TIME OF BUYING, SELLING

Here is an example of how TDS will be applicable if an individual sells his/her VDA holdings.
Suppose Mr. A bought bitcoins in the previous years. In August 2022, he decided to sell a part of his holdings. Here is who will have to pay TDS and how it will be deducted.

a) If the transaction is directly between buyer and seller

If the transfer of VDA is directly between the buyer and seller and no third party (i.e., Exchange) is involved, then the buyer of VDA will be required to deduct the tax on the amount paid (if it exceeds the specified amount).

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

As the transfer of VDA happens via exchanges, the exchange will have to deduct tax at the time of transferring payment from the buyer to the seller of the VDA.

c) If the transfer of VDA happens via Exchange and broker (VDA is not owned by the Exchange)

If the payment made at the time of sale of VDA is a transfer by an Exchange from the buyer to the seller and is done through a broker (the broker is not the owner of the VDA), then TDS can be deducted either by the Exchange or broker. To ensure that TDS is not deducted twice, there can be a written agreement between the Exchange and the broker. The broker shall be responsible for deducting tax on such credit/payment. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.

d) If the transfer of VDA happens via Exchange and VDA is owned by the Exchange

As there are only two parties involved, buyer and seller (i.e., Exchange), then the buyer of VDA will be required to deduct tax at the time of making payment. However, it may happen that the buyer does not know that VDA is owned by the Exchange. In such a scenario, the Exchange may enter into a written agreement with the buyer or his broker that in all such transactions, the Exchange would be paying the tax on or before the due date for that quarter.

The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. If these conditions are complied with, the buyer or his broker would not be held as an assessee in default under section 201 of the Act for these transactions.

Referring to the above case, Wadhwa says, "At the time of buying a VDA, the buyer must ensure that TDS is being deducted by the Exchange at the time of making payment. If the Exchange does not deduct TDS or fails to deduct TDS, then the buyer or broker can be held liable for failing to meet the obligation."

WHAT IS THE TDS CERTIFICATE THAT WILL BE ISSUED?

As per the notification issued by the CBDT, a new TDS certificate, i.e., Form 16E, has been introduced. The buyer (who has deducted tax at the time of making payment) will be required to issue Form 16E to the seller of the VDA within 15 days from the due date of furnishing the challan-cum-statement in Form 26QE.

As per the notification issued, the tax deducted at the time of sale of VDA must be deposited within 30 days from the end of the month in which the tax is deducted. The tax will be deposited using challan-cum-statement in Form no 26QE.

Suppose the sale of VDA happened on July 20, 2022, via an Exchange. In a written agreement, the Exchange will be responsible for deducting tax at the time of making payment to the seller. The Exchange has to deposit tax with the government by August 30, 2022 and issue Form 16E to the seller by September 14, 2022.

WHAT IF PAYMENT IS MADE IN KIND OR TWO VDAS ARE EXCHANGED?

Wadhwa says, "If an individual at the time of buying of VDAs makes the payment in kind (say by offering certain services), then also a buyer is required to deduct the tax at the rate of 1%. Further, if there is an exchange of VDAs between two persons, then also tax has to be deducted. Tax will be deducted by both persons.

For instance, Mr. A buys Bitcoin from Mr. B in exchange for Ethereum. In this case, there is a transfer of VDA from both sides- transfer of Bitcoin by Mr. B and transfer of Ethereum by Mr. A. Accordingly, tax has to be deducted by both i.e., Mr. A as well as Mr. B. Both parties will pay their respective taxes and share the evidence of payment with the other party."

FURTHER CLARIFICATION NEEDED

Badala adds, "Where payment is facilitated by a payment gateway, the payment gateway is required to obtain an undertaking that the payer has deducted tax. The monetary threshold for applicability of TDS provisions of Rs. 10,000 (or Rs. 50,000 in case of specified persons) is required to be seen from 1st April 2022 onwards and not from 1st July 2022 onwards when the TDS provisions come into force. The guidelines provide clarity on many aspects but certain doubts still persist. It is not clear how the buyer who is buying VDA on the exchange will get to know whether the exchange is the owner of the VDA or someone else. Potentially, exchange/s may find it convenient to hold the inventory and agree with the buyer that they will discharge the tax obligation on a quarterly basis. Another doubt is in relation to the obligation of the payment gateways – payment gateways are merely facilitators in the payment process; they do not per se incur any liability of their own. Expecting them to obtain an undertaking from the payers appears onerous. As regards the clarification that TDS needs to be done on net consideration (excluding GST and charges), there  appears to be an error as the guidelines mention GST / charges ‘levied by the deductor’ shall be excluded – the fact is GST / charges are ‘levied by the exchange/brokers’."