INCOME TAX & TDS ON CRYPTO CURRENCY (VDA)

SECTION 115BBH – TAX ON INCOME FROM VIRTUAL DIGITAL ASSETS

As per Section 115BBH, virtual digital assets (cryptocurrencies and non-fungible tokens) would be taxed at a flat rate of 30% on profits. This section will be effective from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 (Financial Year 2022-23) and subsequent assessment years.

Tax shall be levied in the same manner as winnings from horse races or other speculative transactions are treated.
No deduction will be allowed in respect of such income from virtual digital assets except for the deduction as “Cost of Acquisition”.
Cost of Acquisition does not include infrastructure cost which might be incurred on mining crypto assets.
Losses incurred from one virtual digital currency cannot be set-off against any income, not even from the income from another digital currency. However, Rebate under section 87A is available.
If any person receives Digital Currency as a gift, it would be taxable in the hands of recipient.

SECTION 194S – TDS ON VIRTUAL DIGITAL ASSETS

The Finance Bill, 2022 has inserted a new section 194S which requires to deduct tax at source (TDS) @ 1% on the purchase consideration on transfer on virtual digital asset to any resident. Section 194S is effective from 1st July, 2022.

TDS @ 1% shall be paid irrespective of profit or loss on Virtual Digital Asset (mainly cryptocurrencies). Virtual Digital Asset is defined under Section 2(47A). In case of transfer of virtual digital assets, tax shall be deducted from the gross amount of consideration paid to the resident person.

However, in some cases, before releasing the consideration, the person responsible for the transfer of virtual digital asset shall ensure that tax has been paid in respect of such consideration:

Where consideration is wholly in kind;
Where a transaction is in exchange for another virtual digital asset, and there is no part in cash; or
Where consideration is partly in cash and partly in kind, but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer.

According to Section 194S of the Income tax Act, Specified Person is defined as:

a person being an individual or Hindu Undivided Family (HUF) whose total sales, gross receipts or turnover in case of business does not exceed Rs 1 crore and in case of profession does not exceed Rs 50 lakh during the financial year immediately preceding the financial year, or
a person being an individual or Hindu Undivided Family (HUF) not having any income under the head “Profits and gains of business and profession”.

In case of Specified Person, the provisions of section 203A (Requirement to obtain Tax deduction and Collection Account Number) and 206AB (Special provision for deduction of TDS for Non-Filers of Income Tax Returns) will not be applicable.

Further, in case the payer is a Specified Person and the aggregate value of such consideration to a resident is less than Rs.50,000 during the financial year, no tax shall be deducted. However, in any other case, the threshold limit is proposed to be Rs.10,000 during the financial year.

TDS collected under Section 194S shall be deposited within 30 days from the end of the month in which the deduction has been made. Deposit of tax so deducted shall be made in the challan-cum-statement Form 26QE.

If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.

CIRCULAR NO. 13 of 2022 – Guidelines for removal of difficulties under sub-section (6) of section 194S of the Income-tax Act, 1961 issued by CBDT on 22nd June, 2022

Question 1. Who is required to deduct tax when the transfer of VDA is taking place on
or through an Exchange and payment is made by the purchaser to the Exchange
(directly or through broker) and then from the Exchange it goes to seller directly or
through the broker?
Answer: According to section 194S of the Act, any person who is responsible for paying to
any resident any sum by way of consideration for transfer of VDA is required to deduct tax.
Thus, in a peer to peer (i.e. direct buyer to seller) transaction, the buyer (i.e. person paying the consideration) is required to deduct tax under section 194S of the Act.
However, if the transaction is taking place on or through an Exchange there is a possibility of
tax deduction requirement under section 194S of the Act at multiple stages. Hence, in order
to remove difficulties for transactions taking place on or through an Exchange, the following
clarifications are issued:-
(i) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by a person other than the Exchange: In this case buyer
would be crediting or making payment to the Exchange (directly or through a broker). The
Exchange then would be required to credit or make payment to the owner of VDA being
transferred, either directly or through a broker. Since there are multiple players, to remove
difficulty it is clarified that:

Tax may be deducted under section 194S of the Act only by the Exchange which is
crediting or making payment to the seller (owner of the VDA being transferred). In a
case where broker owns the VDA, it is the broker who is the seller. Hence, the amount
of consideration being credited or paid to the broker by the Exchange is also subject to
tax deduction under section 194S of the Act.
In a case where the credit/payment between Exchange and the seller is through a
broker (and the broker is not seller), the responsibility to deduct tax under section
194S of the Act shall be on both the Exchange and the broker. However, if there is a
written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax under section 194S of the Act. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.

(ii) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by such Exchange: In this case there are no multiple
players. The buyer is required to deduct tax under section 194S of the Act. However, there may be a practical issue as the buyer may not know whether the VDA being transferred is
owned by the Exchange or not. Hence, there may be genuine doubt in the mind of buyer with regard to its responsibility to deduct tax under section 194S of the Act. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker. To remove this difficulty, it is clarified that while the primary responsibility to deduct tax under section 194S of the Act, in this case, remains with the buyer or his broker, as an alternative the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due
date for that quarter. The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. 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.
For the purpose of this circular,-
(i) The term “Exchange” means any person that operates an application or platform for
transferring of VDAs, which matches buy and sell trades and executes the same on its
application or platform.
(ii) The term “Broker” means any person that operates an application or platform for
transferring of VDAs and holds brokerage account/accounts with an Exchange for
execution of such trades.

Question 2: Question no 1 was with respect to transactions where the consideration for
transfer of VDA is not in kind. How will this operate in a situation where it is in kind or
in exchange of another VDA?

Answer: According to proviso to sub-section (1) of section 194S of the Act, there could be
situations 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 these situations, 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.

In the above situation, 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 as well as 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. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced.
However, if the transaction is through an Exchange there is practical issue in implementing
this provision. In order to address this practical issue and to remove difficulty, it is clarified
that in such a situation, as an alternative, tax may be deducted by the Exchange. Such an alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.
If such an alternative mechanism is exercised,
(i) the Exchange would be required to deduct tax for both legs of the transactions and pay
to the Government. In the Form 26Q it will, for the reasons explained before, need to
report it as tax deducted on both legs of the transaction.
(ii) the buyer and seller would not be independently required to follow the procedure
prescribed in proviso to sub-section (1) of section 194S of the Act.

When the Exchange opts for deduction of tax under section 194S of the Act on such
transactions, there is also a possibility that the tax amount deducted is also in kind and needs to be converted into cash before it can be deposited with the Government. In this regard, the following mechanism shall be adopted by the Exchange
(i) At the time of transaction, the Exchange will deduct TDS in the pair being traded. For
example, in case of trade for Monero to Deso, 1% of Monero and 1% Deso will be
deducted as tax under section 194S of the Act by the Exchange and balance shall be
transferred to the customer. The trail of transactions evidencing deduction of 1% of
consideration for every VDA to VDA trade shall be maintained by the Exchange.
(ii) The Exchanges shall immediately execute a market order for converting this tax
deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will
ensure that the tax deducted under section 194S of the Act in the form of non-primary
VDAs like Deso/Monero is converted to an equivalent of primary VDAs which have a
ready INR market. Time stamps of timing of orders to be maintained to ensure such
conversion of VDAs withheld to be done on immediate basis by the Exchange. If the
taxes are withheld in primary VDAs, this step would be ignored.
(iii) All the tax deducted under section 194S of the Act in the form of primary VDAs {or
converted into primary VDA under step (ii)} will be accumulated for the day. Time limit
will be from 00:00 hours to 23:59 hours. VDA accumulation by the Exchange shall be
verifiable from the trail of orders for VDA to VDA trades executed during the day.
(iv) The accumulated balance of primary VDAs at 00.00 hours will be converted into INR
based on the market rate existing at that time. In order to bring in consistency and to
avoid discretion, the Exchanges are required to place market order at 00:00 hours for the
tax withheld {or converted under step (ii)} in form of primary VDAs for conversion into
INR. These sell market orders shall be executed based on the open buy orders in the
market. Price and quantity data for every matched trade shall be maintained by the
Exchange and shall be available for verification. It shall be verifiable from the system
coding that the conversion into INR happened at the first available buy order based on the
prevailing buy order book of the respective Exchange at the time of conversion. As a
practice, the respective Exchange liquidating the VDA shall be prohibited to be a buyer
for these VDAs.

(v) Customer will be issued a contract note over email which will include the amount of
tax withheld in kind under section 194S and the amount of INR realized from such tax
withheld.
(vi) The tax withheld in kind under section 194S of the Act and converted into INR by
following the above procedure shall be deposited in the Government Account as per the
time line and process given in the Income-tax Rules 1962.
It is clarified that there would not be any further TDS for converting the tax withheld in kind
in the form of VDA into INR or from one VDA to another VDA and then into INR.

Question 3: Whether the provision of section 194Q of the Act is also applicable on
transfer of VDA?
Answer Without going into the merit whether VDA is goods or not, it is clarified that once
tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

Question 4: Whether the consideration for transfer of VDA shall be on Gross basis after
including GST/commission or it shall be on “net basis” after exclusion of these items.

Answer: In order to remove difficulty, it is clarified that the tax required to be withheld under
section 194S of the Act shall be on the “net” consideration after excluding GST/charges
levied by the deductor for rendering service.

Question 5: In transactions where payment is being carried out through payment
gateways, there may be tax deduction twice.

To illustrate that a person ‘X’ is required to make payment to the seller for transfer of VDA. He makes payment of one lakh rupees through digital platform of “ABC”. On these facts liability to deduct tax under section 194S of the Act may fall on both “X” and “ABC. Is tax required to be deducted by both?
Answer: In order to remove this difficulty, it is provided that in the above example, the
payment gateway will not be required to deduct tax under section 194S of the Act on a
transaction, if the tax has been deducted by the person (‘X’) required to make deduction
under section 194S of the Act. Hence, in the above example, if “X” has deducted tax
under section 194S of the Act on one lakh rupees, “ABC” will not be required to deduct tax
under section 194S of the Act on the same transaction. To facilitate proper implementation,
“ABC” may take an undertaking from “X” regarding deduction of tax.

Question 6: Section 194S shall come into effect from the 1st July 2022. The liability to
deduct tax under section 194S of the Act applies only when the value or aggregate value
of the consideration for transfer of VDA exceeds fifty thousand rupees during the
financial year in case of consideration being paid by specified person and ten thousand
rupees in other cases. It is not clear how this limit of fifty thousand (or ten thousand) is
to be computed?
Answer: It is clarified that,-

(i) Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to
the financial year, calculation of consideration for transfer of VDA triggering deduction
under section 194S of the Act shall be counted from 1st April, 2022. Hence, if the value or
aggregate value of the consideration for transfer of VDA payable by a person exceeds
fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23
(including the period up to 30th June 2022), the provision of section 194S of the Act shall
apply on any sum, representing consideration for transfer of VDA, credited or paid on or
after 1st July 2022.
(ii) Since the provision of section 194S of the Act applies at the time of credit or payment
(whichever is earlier) of any sum, representing consideration for transfer of VDA, such
sum which has been credited or paid before 1st July 2022 would not be subjected to tax
deduction under section 194S of the Act.

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INCOME TAX & TDS ON CRYPTO CURRENCY (VDA)