The Union Ministry of Finance on June 22 issued a circular clarifying the tax deducted at source (TDS) clause of the new rules on transfer of virtual digital assets (VDAs, or crypto assets) by an individual, whether directly or through a broker, on or outside a cryptocurrency exchange platform.
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The tax, announced during the 2022-23 Union Budget speech earlier this year, is being introduced through a new section, 194S, in the Income tax Act, 1961, the circular said.
In the notice, the ministry clarified a number of points, including on whom the onus would be in case of a transfer of VDAs. The circular has sought to remove "difficulties" by issuing the following guidelines:
1. Who will deduct tax when transfer of VDA is with an exchange as the intermediary?
A. The exchange must deduct the tax before transferring the payment to the seller of the VDA. In case the seller is transferring the VDA through a broker who is using the exchange, then both the broker and the exchange share the responsibility of deducting the TDS, unless there is a written agreement stating that only the broker will be deducting TDS.
In case the exchange owns the VDA being transferred, then ideally, the buyer should deduct tax. But since it may not always be clear to the buyer if the exchange owns the asset, the guidelines allow for the exchange to enter into a written agreement with the buyer stating that it will be paying tax, and furnish quarterly statements to the government.
"If these conditions are complied with, the buyer or his broker would not be held as assessee in default under Section 201 of the Act for these transactions," the circular read.
2. What about in cases where the transfer of VDA is in kind, or in exchange for another virtual asset?
A. For a transfer of VDA in kind, the buyer must ensure that the seller shows proof, via challan, that s/he paid 1 percent of the value of the asset as tax before making the transfer. In case of an exchange of one VDA for another, then both parties are the buyer and seller, and both will need to show proof to the other of payment of TDS, the guidelines stated.
In case these transfers are being done through a cryptocurrency exchange platform, then the exchange will deduct tax — from the seller in the first case and both parties in the second — and report it to the government through Form 26Q, the guidelines said.
The exchange platform is also responsible for converting the 1 percent TDS — if deducted in kind or the VDA in question — into equivalent value in rupees at the prevalent rate of exchange before depositing it with the government, the guidelines stated.
3. Will tax still be applicable under 194Q of the I-T Act?
A. Once tax is paid under Section 194S, Section 194Q does not apply, stated the guidelines. Section 194Q applies to individuals whose business turnover, through purchase of goods, exceeds Rs 10 crore per annum.
4. Will the TDS be levied on a gross basis, including GST/commission, or net basis, excluding GST/commission?
A. The tax will be deducted on a net basis, after excluding GST/commission levied by the deductor for providing the service.
5. What will happen if the payment for the transfer of a VDA is made through a payment gateway?
A. If TDS has been deducted as prescribed under the new guidelines under Section 194S, then no tax will need to be deducted by the payment gateway, the notice clarified.
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6. Section 194S applies a maximum annual transfer threshold of Rs 50,000 per annum for HUF (Hindu Undivided Family) or individual without a profits from business, and Rs 10,000 per annum for HUF or individual who reports a profit/gain from business. How will this amount be computed, as the new rule will come into effect from July 1, 2022?
A. The amount will be calculated from April 1, 2022, as the threshold is according to financial year, the guidelines stated.
| Seller | Buyer | Is Broker Involved in selling? | Through Exchange? | Is transaction in cash or in kind? | Who will deduct tax? | Remarks |
| Any Person | Any Person | No | Yes | In cash | Exchange | - |
| Broker | Any Person | - | Yes | In cash | Exchange | - |
| Any Person | Any Person | Yes | Yes | In cash | Exchange and Broker | Only Broker will deduct if there is an agreement between the Broker and Exchange that the Broker will deduct the tax. |
| Exchange | Any Person | No | Yes | In cash | Buyer | No tax will be deducted if the Exchange enters into an agreement with the buyer or broker that the Exchange would pay the tax on or before the due date for that quarter. |
| Any Person | Any Person | No | Yes | In kind | (a) Buyer and Seller; or(b) Exchange | Buyer and seller will pay their respective taxes and share the evidence of payment with the other party.As an alternative, the Exchange can deduct from both the parties if there is a written agreement with both the parties. |
| Broker | Any Person | - | Yes | In kind | (a) Broker and Seller; or(b) Exchange | Broker and seller will pay their respective taxes and share the evidence of payment with the other party.As an alternative, the Exchange can deduct from both the parties if there is a written agreement with both the parties. |
| Any Person | Any Person | Yes | Yes | In kind | (a) Buyer and Seller; or(b) Exchange and Broker | Buyer and seller will pay their respective taxes and share the evidence of payment with the other party.As an alternative, the Exchange and Broker can deduct from both the parties if there is a written agreement with both the parties.However, only Broker will deduct if there is an agreement between the Broker and Exchange that the Broker will deduct the tax. |
| Exchange | Any Person | No | Yes | In kind | Exchange and Buyer | No tax will be deducted by the buyer if the Exchange enters into an agreement with the buyer that the Exchange would pay the tax on or before the due date for that quarter. |
