Trading crypto on foreign exchanges to avoid 1% TDS may land you in legal troubles: Experts

Crypto taxation: You may draw the ire of the taxmen and land in legal trouble if planning to avoid 1% TDS by trading crypto on foreign exchanges from July 1

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You may draw the ire of the taxmen and land in legal trouble if planning to avoid 1% TDS by trading crypto on foreign exchanges from July 1, according to tax experts.

The recent CBDT circular on the implementation of 1% TDS rule for crypto transactions has provided a lot of clarity to users. The circular has allowed crypto exchanges to deduct TDS on behalf of the buyer. While the clarification is good for those doing transactions on Indian exchanges, many crypto users have been wondering whether they can avoid the TDS by trading on foreign exchanges.

Experts say that the intention of the law is clear. It doesn’t want to let any Indian taxpayer, who is also doing crypto transactions, avoid 1% TDS. But the implementation of the same on foreign exchanges may not be easy.

“Through its clarification, CBDT has made the intention of law very clear. However, application of this law on transfer made through a foreign exchange will be tricky,” Neeraj Agarwala, Partner, Nangia Andersen India, told FE Online.

According to the circular, exchange means any person that operates an application or platform for transferring virtual digital assets, which matches buy and sell trades and executes the same on its application or platforms. 

Beware of legal troubles

The difficulty in the implementation of the TDS rule on foreign exchanges doesn’t mean Indian traders can easily avoid the 1% TDS rule.

“Based on the CBDT circular, as a buyer, you can argue that the obligation under section 194S of the Act falls on the foreign exchange and broker. However, there may be a risk of potential tax litigation,” said Agarwala.

As per rules, payments made to a non-resident are not free from TDS. In such cases, provision of section 195 of the Act comes into play and banks require submission of a CA certificate confirming if applicable taxes have been deposited, before processing such payments.

Need further clarifications

Experts say that further clarifications are required from the CBDT regarding the implementation of TDS rule on transactions done through foreign exchanges.

“The provision of section 194S is applicable when the buyer is making payment to a resident seller of VDA. If he is buying cryptos on exchange, the primary responsibility to deduct TDS is of the buyer. However, CBDT clarified in the circular that exchange may deduct TDS. It transpires that even if someone is buying the cryptos on or through foreign exchange, such exchange ought to deduct TDS if the seller of VDA is Indian resident. However, CBDT should clarify how this will practically be implemented,” Gopal Bohra, Partner at N.A. Shah Associates.

ALSO READ | Who will deduct 1% TDS from July 1 – buyer or crypto exchange?

TDS under section 194S of the Act is required to be deducted only in case payments are made to a resident. However, when a buyer in India purchases VDA through a foreign exchange, he may not be privy to the particulars of the seller and will be unequipped to determine their residency.

“In such cases, CBDT has placed the responsibility on both the Exchange and the broker to deduct and deposit, applicable TDS in India. But practically, we believe that it will be difficult for CBDT to enforce these regulations on foreign exchanges or brokers that do not have any presence in India,” said Agarwala.

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