Given the popularity of Virtual Digital Assets such as cryptos with the tech-savvy and younger generation, there has been increasing regulatory interest in them.

The Union Budget 2022 was a milestone since the government imposed 30 per cent tax (plus surcharge and cess) on VDAs, putting these high-risk assets under official tax net. It must be noted that reward points, gift vouchers/cards, mileage points etc. used to obtain goods or services for discount/award including subscription to websites are not considered as VDAs under Income tax Act. Section 194S in the Income Tax Act requires 1 per cent TDS to be paid by the buyer for every transaction from July 1.

The nature of TDS means low-capital crypto traders have to deal with this carefully. The overall 30 per cent tax also pushes up the breakeven point for VDA investors and speculators alike. There were a lot of concerns and queries due to ambiguity with respect to operational terms. In a bid to clarify these doubts, CBDT has issued two circulars (June 22 and June 28). Here is a low-down.

Who deducts tax, who doesn’t

Section 194S requires tax deduction to be made by the buyer at the time of payment to the seller, if the aggregate value payable does exceed ₹50,000 in a financial year. For transactions below the threshold, the section isn’t applicable.

These provisions would be applicable to certain ‘Specified persons’ and these are individuals/Hindu Undivided Family (HUF) who do not have any income under the head “profit and gains of business or profession”.

Individual/HUF with income under “profits and gains of business or profession” but their gross turnover does not exceed Rs 1 crore (Rs 50 lakh in case of profession), they will also be considered specified persons. The thresholds trigger in the financial year immediately preceding the year of VDA transfer.

TDS liability

The timeframe for the computation of value of VDA transfer is April 2022 to March 2023. Since the threshold amount is for the entire financial year, the starting point of the period will be April 2022 even though the transaction(s) on or after July 1, 2022, will only be liable for TDS.

Exchange trades

Many VDA/crypto transactions happen through crypto exchanges. When such VDA transfers take place through the exchanges or brokers and the identity of the seller is not known exactly, TDS will have to be deducted by the exchange/broker. But in this case the broker cannot be the seller.

In case of peer-to-peer transactions, where the transaction between the buyer and seller is outside the purview of exchange, then the buyer must deduct the tax and deposit the same with the government. The tax deductor must furnish a quarterly statement in Form 26Q, and Form 26 QE for specified persons.

Trades involving partial cash/kind

Some crypto buyers and sellers settle VDA transactions in such a way that payment is made in kind or in partial cash and kind. Where the consideration is in partial cash and kind or in exchange of a different crypto asset, the buyer must ensure that the tax has been paid before releasing the payment to the seller. In such a case the buyer can release the payment only after the proof of payment i.e., tax challan details are furnished.

In the above case, both the parties are buyers and sellers. For example, let’s say Rahul exchanges a bitcoin for Ether with Vidya. Rahul becomes buyer of Ether and Vidya is the buyer of Bitcoin or vice-versa. So, both will need to pay tax on this transfer and furnish the evidence to each other so that VDAs can then be exchanged.

If this is an exchange-routed transaction the liability of TDS vests with the exchange based on a written contractual agreement between the buyers/sellers.

GST/commission, payment gateway

The CBDT has clarified that TDS will be on net amount and not on gross amount i.e. excluding GST/ charges etc. For instance, Muthu buys a VDA, say Solana, and the total amount payable including 18 per cent GST (assuming no other charges) is ₹1 lakh. So, effectively the price of the asset is ₹84,745.

If the TDS is to be deducted on ₹1 lakh then the TDS will be ₹1,000 which will include a tax on already charged 18 per cent GST. But on net basis, TDS on ₹84,745 will be ₹847.45.

There have been concerns that in transactions where payment is being carried out through payment gateways, there can be double TDS. But CBDT has spelt out the process so that TDS is not deducted twice. For e.g., Sathya is required to make a payment for transfer of certain Ether cryptocurrency.

Now if Sathya has deducted tax before transacting on a digital platform ‘ABC’, then ABC does not need to deduct tax. To facilitate proper implementation, ABC may take an undertaking from Sathya.

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