Buyer of virtual digital assets (VDA) outside crypto exchanges will now be required to deduct the tax at source (TDS) on the payment made in cash to the seller. However, in case of exchange of one VDA with other, both buyer and seller are required to deduct the tax.

Rate of TDS under newly-inserted section 194S in the Income Tax Act is 1 per cent. It will come into effect from July 1. New details are part of a circular issued by the Central Board of Direct Taxes (CBDT) on Tuesday. This is the second such circular, whereas the first had put the onus of TDS on the exchanges if transaction has been done on exchanges. Transaction taking place outside the exchange is called peer to ‘peer to peer’ (P2P) transactions

Section 194S

For P2P transaction, the buyer (i.e., person paying the consideration) is required to deduct tax under section 194S of the Act and deposit with the government, in case the consideration is other than in kind. “It may be clarified that the TDS shall be on consideration for transfer of VDA less GST,” the circular said.

Further, there could be a situation where the consideration is in kind or in exchange of another VDA or partly in kind and cash is not sufficient to meet the TDS liability. In this situation, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

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Thus, the buyer will release the consideration in kind after seller provides proof of payment of such tax (e.g., challan details etc.). In a situation where VDA ‘A’ is being exchanged with another VDA ‘B’, both the persons are buyer and 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. This would then be required to be reported in TDS statement along with challan number by both of them,” the circular said.

Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, said the previous circular on VDAs did not deal comprehensively with the withholding obligations in case of peer-to-peer transactions. This circular clarifies the mechanism of deducting tax in such transactions in greater detail and provides more clarity. This shall increase the compliance burden for both buyers and sellers in transactions happening outside exchanges as unlike in the case of exchange, where the exchange would take care of these compliances, here the buyer will have to do the compliances.

“Though the buyer and seller will not be required to apply for TAN for depositing the TDS under 194S, other implications of section 206AA for non-furnishing of PAN to each other would still be required to complied with. Also, once withholding is done under 194S, there is no need of further withholding under any other section,” he said.