TDS on Cryptocurrency Transactions in India: The Central Board of Direct Taxes (CBDT) today issued guidelines to remove difficulties with respect to the new Section 194S which will come into effect from the 1st of July 2022.
Section 194S was inserted in the Income Tax Act through Finance Act 2022. It mandates deduction of 1% TDS on transfer of crypto and other virtual digital assets. Here are the some of the most important clarifications from the circular explained in a Q&A format that may help crypto buyers and sellers in India:
Who will deduct TDS while transferring crypto via an exchange?
According to the circular, the exchange will have to deduct TDS in this case.
“Tax may be deducted under section 194S of the Act only by the Exchange which is crediting or making payment to the seller (owner of the VDA being transferred),” the circular said.
“In a case where broker owns the VDA, it is the broker who is the seller,. Hence, the amount of consideration being credited or paid to the broker by the Exchange is also subject to tax deduction under section 194S of the Act,” it added.
Who will deduct TDS if transferring crypto on an exchange through a broker, who is not the seller?
The circular says that in a case where the credit/payment between Exchange and the seller is through a broker (and the broker is not seller), the responsibility to deduct tax under section 194S of the Act shall be on both the Exchange and the broker.
“However, if there is a written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax under section 194S of the Act,” the circular said.
However, 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.
Who will deduct TDS in case of crypto transfer through the exchange, which is also the owner of the asset?
In this case, the buyer will have to deduct the TDS. However, there may be cases when the buyer would not know whether the exchange is the owner of the asset or not. To remove any confusion in such cases, the circular said that as an alternative, “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.”
“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,” the circular further said.
How will TDS apply in case of transfer of crypto for another cryptocurrency?
According to the circular, if a person is transferring a crypto asset to another person in exchange for another crypto then both of them will be buyers as well as sellers. In this case both of them will have to pay the tax and show evidence for the exchange of the virtual digital assets.
“In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged,” the circular said.
“This would then be required to be reported in TDS statement along with challan number. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced,” it added.
In case crypto is transferred for another crypto through a cryptocurrency exchange then as an alternative tax may be deducted by the exchange itself based on written contractual agreement with the buyers/ sellers.
Can payment gateways deduct TDS on crypto transfers?
There may be instances where tax may get deducted twice if payment is made through payment gateways. To remove the difficulty in such cases, the circular clarified: “In order to remove this difficulty, it is provided that in the above example, the payment gateway will not be required to deduct tax under section 194S of the Act on a transaction, if the tax has been deducted by the person (‘XYZ’) required to make deduction under section 194S of the Act.”
Will TDS rule apply only when the value the of crypto transfer is above Rs 50,000 or Rs 10,000?
As per Section 194S, the liability to deduct tax applies only when the value or aggregate value of the consideration for transfer of VDA exceeds Rs 50,000 during the financial year in case of consideration being paid by a specified person and Rs 10,000 rupees in other cases.
Clarifying how this limit of Rs 50,000 or Rs 10,000 will be calculated, the circular said: “Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to the financial year, calculation of consideration for transfer of VDA triggering deduction under section 194S of the Act shall be counted from 1st April 2022.”
“Hence, if the value or aggregate value of the consideration for transfer of VDA payable by a person exceeds fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23 (including the period up to 30th June 2022), the provision of section 194S of the Act shall apply on any sum, representing consideration for transfer of VDA, credited or paid on or after 1st July 2022,” it added.
No TDS on sum credited or paid before 1st of July 2022
“Since the provision of section 194S of the Act applies at the time of credit or payment (whichever is earlier) of any sum, representing consideration for transfer of VDA, such sum which has been credited or paid before 1st July 2022 would not be subjected to tax deduction under section 194S of the Act,” the circular said.