TDS on Virtual Digital Assets (VDAs) Explained: Section 194S Guidelines

TDS on Virtual Digital Assets (VDAs) Explained: Section 194S Guidelines

The Finance Act of 2022 introduced Section 194S in the Income-tax Act of 1961 (ITA), which came into effect on July 1, 2022.

If you engage in trading virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), a provision has been implemented for a 1% TDS deduction on payments made for the transfer of VDAs. This is applicable when the transaction value exceeds Rs 10,000 or Rs 50,000 in the case of specified individuals during a particular year. The tax deduction must be reported to the government using Form 26Q.

For example, if you buy cryptocurrency worth Rs 1,00,000, you should deduct TDS at the rate of 1% from your payment, resulting in a balance of Rs 99,000 to be paid to the seller. A deposit of Rs 1,000 is required to be made to the government.

Who qualifies as a Specified Person?

TDS liability under Section 194S applies when the payment for the transfer of VDA exceeds Rs 50,000 in a financial year for specified individuals and Rs 10,000 for others.

In this context, a Specified Person refers to:

- An individual or Hindu Undivided Family (HUF) without income from business and profession.

- An individual or HUF with business income up to Rs 1 crore.

- An individual or HUF with professional receipts up to Rs 50 lakh.

The Central Board of Direct Taxes (CBDT) has recently issued clarificatory guidelines for TDS deduction on VDAs.

Key points from the guidelines regarding the application of Section 194S are as follows:

Transfer of VDA (in cash) through an Exchange (that doesn't own the VDA)

If the transfer of VDA occurs on or through an Exchange (that doesn't own the VDA), the transaction chain may involve several parties as follows:

Buyer⇒ Broker ⇒ Exchange ⇒ Broker⇒ Seller (owner)

In this scenario, the exchange making the payment to the seller should deduct TDS. However, if the payment between the seller and the exchange is conducted through a broker, both parties are responsible for deducting tax.

Alternatively, the exchange and broker can agree that the broker will deduct TDS for all such transactions. The exchange must submit a quarterly report using Form No. 26QF by the due date.

Transfer of VDA (in cash) through an Exchange (that doesn't own the VDA)

If the transfer of VDA occurs on or through an exchange (that doesn't own the VDA), fewer parties are involved, and the buyer or their broker is responsible for deducting TDS.

Alternatively, the exchange can enter into an agreement with the buyer or their broker, stating that the exchange will pay the due tax by the quarterly due date. In this case, the exchange must submit a quarterly report using Form No. 26QF by the due date.

Transfer of VDA (in kind) through an Exchange, broker, or in exchange for another VDA

Unlike the above cases, the payments can be made in kind, partially in kind, or in exchange for another VDA. In such situations, the exchange may deduct tax on both legs of the transactions based on their agreement. If the transaction is not conducted through an Exchange, the person making the payment must deduct and deposit the TDS.

If TDS is deducted by the exchange using a VDA (in kind):

a. The exchange should maintain records for each VDA-to-VDA trade.

b. The exchange should convert the withheld tax in kind into one of the primary VDAs [Bitcoin (BT), Ethereum (ETH), USD Tether (USDT), and USD Coin (USDC), etc.], which can be easily converted into Indian Rupees (INR).

c. The withheld tax, now converted into primary VDA, must be accumulated for the day from 00:00 hours to 23:59 hours.

d. The accumulated balance of primary VDAs with the Exchange at 00:00 hours should be converted into INR at the market rate by placing a sell order.

e. The Exchange needs to issue a contract note via email to the customer, which should include the TDS on VDA withheld in kind and its INR value upon conversion.

f. The Exchange is required to deposit the INR value in the government account within the due dates.

For the assessment year (AY) 2022-23, Form No. 26Q includes provisions for reporting such transactions. Similarly, Form No. 26QE has been introduced for specified individuals.

The interplay between TDS under Section 194S and Section 194Q

If tax is deducted under Section 194S of the ITA, there is no requirement to deduct TDS under Section 194Q (applicable for the purchase of goods).

The tax will be deducted from the net consideration after excluding Goods and Services Tax (GST) or other charges.

Payment gateways and TDS under Section 194S

If the payment for the transfer of a VDA is made through a payment gateway, the payment gateways are exempted from deducting TDS.

The Finance Act of 2022 introduced Section 194S in the Income-tax Act of 1961 (ITA), which came into effect on July 1, 2022.

If you engage in trading virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), a provision has been implemented for a 1% TDS deduction on payments made for the transfer of VDAs. This is applicable when the transaction value exceeds Rs 10,000 or Rs 50,000 in the case of specified individuals during a particular year. The tax deduction must be reported to the government using Form 26Q.

For example, if you buy cryptocurrency worth Rs 1,00,000, you should deduct TDS at the rate of 1% from your payment, resulting in a balance of Rs 99,000 to be paid to the seller. A deposit of Rs 1,000 is required to be made to the government.

Who qualifies as a Specified Person?

TDS liability under Section 194S applies when the payment for the transfer of VDA exceeds Rs 50,000 in a financial year for specified individuals and Rs 10,000 for others.

In this context, a Specified Person refers to:

- An individual or Hindu Undivided Family (HUF) without income from business and profession.

- An individual or HUF with business income up to Rs 1 crore.

- An individual or HUF with professional receipts up to Rs 50 lakh.

The Central Board of Direct Taxes (CBDT) has recently issued clarificatory guidelines for TDS deduction on VDAs.

Key points from the guidelines regarding the application of Section 194S are as follows:

Transfer of VDA (in cash) through an Exchange (that doesn't own the VDA)

If the transfer of VDA occurs on or through an Exchange (that doesn't own the VDA), the transaction chain may involve several parties as follows:

Buyer⇒ Broker ⇒ Exchange ⇒ Broker⇒ Seller (owner)

In this scenario, the exchange making the payment to the seller should deduct TDS. However, if the payment between the seller and the exchange is conducted through a broker, both parties are responsible for deducting tax.

Alternatively, the exchange and broker can agree that the broker will deduct TDS for all such transactions. The exchange must submit a quarterly report using Form No. 26QF by the due date.

Transfer of VDA (in cash) through an Exchange (that doesn't own the VDA)

If the transfer of VDA occurs on or through an exchange (that doesn't own the VDA), fewer parties are involved, and the buyer or their broker is responsible for deducting TDS.

Alternatively, the exchange can enter into an agreement with the buyer or their broker, stating that the exchange will pay the due tax by the quarterly due date. In this case, the exchange must submit a quarterly report using Form No. 26QF by the due date.

Transfer of VDA (in kind) through an Exchange, broker, or in exchange for another VDA

Unlike the above cases, the payments can be made in kind, partially in kind, or in exchange for another VDA. In such situations, the exchange may deduct tax on both legs of the transactions based on their agreement. If the transaction is not conducted through an Exchange, the person making the payment must deduct and deposit the TDS.

If TDS is deducted by the exchange using a VDA (in kind):

a. The exchange should maintain records for each VDA-to-VDA trade.

b. The exchange should convert the withheld tax in kind into one of the primary VDAs [Bitcoin (BT), Ethereum (ETH), USD Tether (USDT), and USD Coin (USDC), etc.], which can be easily converted into Indian Rupees (INR).

c. The withheld tax, now converted into primary VDA, must be accumulated for the day from 00:00 hours to 23:59 hours.

d. The accumulated balance of primary VDAs with the Exchange at 00:00 hours should be converted into INR at the market rate by placing a sell order.

e. The Exchange needs to issue a contract note via email to the customer, which should include the TDS on VDA withheld in kind and its INR value upon conversion.

f. The Exchange is required to deposit the INR value in the government account within the due dates.

For the assessment year (AY) 2022-23, Form No. 26Q includes provisions for reporting such transactions. Similarly, Form No. 26QE has been introduced for specified individuals.

The interplay between TDS under Section 194S and Section 194Q

If tax is deducted under Section 194S of the ITA, there is no requirement to deduct TDS under Section 194Q (applicable for the purchase of goods).

The tax will be deducted from the net consideration after excluding Goods and Services Tax (GST) or other charges.

Payment gateways and TDS under Section 194S

If the payment for the transfer of a VDA is made through a payment gateway, the payment gateways are exempted from deducting TDS.

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