The Union Budget, 2022 introduced taxation on Virtual Digital Assets (VDA), commonly referred to as cryptocurrencies. Tax will be levied on transfer of VDA at a flat tax of 30% (besides cess and applicable surcharge). It would be interesting to note that income from VDA will have to be computed without deduction for any expenses and setting-off of losses (if any). Further, as one would have expected, the requirement for withholding taxes on VDA transactions has also been introduced with effect from 1 July 2022. The transferee is required to withhold taxes at the rate of 1% on transfer of VDA to a resident taxpayer.
In this connection, the Central Board of Direct Taxes (CBDT) has recently issued a Circular for providing clarifications in the form of Frequently Asked Questions (FAQs) on the withholding tax aspects in relation to transfer of VDA.
Threshold for deductibility of TDS in the hands of buyer
Any person responsible for paying to a resident any sum by way of consideration for transfer of a VDA at the time of credit of such sums shall deduct TDS provided –
- the amount paid (single or aggregate) by ‘specified persons’ (individual or HUF who are required to get their accounts audited) exceeds INR 50,000 during the financial year (FY); or
- the amount paid (single or aggregate) by any other person (other than a ‘specified person’ as mentioned above) exceeds INR 10,000 during the FY.
Effective date of TDS and timelines
As per the provisions, TDS needs to be deducted at the time of payment of consideration to the seller subject to the threshold specified above. Thereafter, TDS shall be deposited within 30 days from the month in which it is deducted.
For example, TDS on payment of consideration for transfer of VDA taking place on 15 August 2022 shall be deducted on 15 August 2022, deposited to the government by 30 September 2022 and Form 16E issued by 15 October 2022.
Transactions completed before 1 July 2022 will not be subject to tax withholding. However, will be considered for determining the threshold limit.
Filing of Forms and Documents
The CBDT has notified TDS returns in Form 26QE and Form 26Q for specified persons and others, respectively along with Form 16E to be issued by the deductor. Besides, the exchange may be required to file Form 26QF for cases where TDS is made on multiple parties.
TDS applicability when transactions are executed via an exchange or broker
Transfer of VDA not only involves buyer and seller but may also involve a broker, assisting the transaction. In addition, the VDA can be owned either by the exchange or the broker.
Where VDA is owned by a person, TDS is to be deducted by the exchange crediting such payment whereas, in case VDA is owned by a broker, consideration paid by the broker to the exchange shall also be subject to TDS. However, where the transaction takes place through a broker (broker not being a seller or owner of the VDA), TDS responsibility lies with both the seller and the buyer unless a written agreement specifies that broker alone will do TDS on all transactions.
Where VDA is owned by the exchange, then the buyer or broker shall be responsible for making TDS.
VDA transferred in exchange for another VDA
Where a VDA is exchanged in place of another, the buyer will release consideration on furnishing of proof of payment of taxes. Where transaction takes place through exchange, then the exchange shall facilitate TDS for both the parties by way of written agreement and pay TDS using the popular VDAs (such as BT, ETH, USDT and USDC) for conversion into INR.
TDS liability on payment gateways
The payment gateways allow users to transfer funds using the common methods of transfer i.e., via bank accounts, wallets, UPI, etc. and helps a user withdraw both the capital and / or gains using the payment gateway directly into the bank account.
The Circular has clarified that the payment gateways shall not be required to do TDS provided TDS has been made by the responsible person under section 194S of the Income Tax Act, 1961 (the Act).
Interplay between sections 194S and 194Q
The Circular additionally states that where TDS is once deducted under section 194S, then there is no TDS to be deducted under section 194Q or any other provisions of the Act.
TDS Liability for transactions other than those taking place on exchange
Where VDA transactions are conducted between a buyer and a seller, the buyer shall be required to do TDS. For transactions in kind, the person shall be both buyer and seller and therefore, buyer shall release the consideration in kind only after the seller provides proof of payment of such tax.
Given the size of the VDA market in India and the number of exchanges involved in the transaction process, the above FAQs are indeed a welcome measure, providing much clarity in terms of implementation of TDS provision. While the exchanges may face the burden of increased administration and costs, the implementation of TDS would certainly bring in stability to the VDA ecosystem.
(By Sudhakar Sethuraman, Tax Partner, Deloitte Haskins & Sells LLP)