What does the law on TDS on VDA, crypto say?
As per the new law, the purchaser of a virtual digital assets (VDA) is required to deduct 1% of the amount paid to the seller (Indian resident) as income tax deducted at source (TDS). The tax is required to be deducted at the time of credit amount or at the time of payment to the individual resident, whichever is earlier. The tax will be deducted only if the amount paid exceeds the specified limit, stated CBDT.
Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, “Effective from July 1, 2022, any person (individual resident, non-resident individual or Exchange) making payment to individual resident at the time of buying crypto, VDA or NFT (as notified by the govt), will be required to deduct TDS on the amount paid at the rate of 1%. The TDS on VDA will be applicable under section 194S of the Income-tax Act, 1961. ”
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.
When will TDS on VDA, crypto apply?
As per the circular issued by CBDT, the TDS on transfer of VDA, crypto will be applicable if:
a) If the amount paid (single or on aggregate basis) by the ‘specified person’ (buyer) exceeds Rs 50,000 during the financial year; or
b) The amount paid (single or on aggregate basis) by any other person / buyer (other than ‘specified person’ as mentioned above) exceeds Rs 10,000 during the financial year.
Who is a ‘specified person’
a) An individual or Hindu Undivided Family (HUF) who does not have any income under the head ‘profit and gains from business and profession’ and
b) An individual or HUF having income under the head ‘profit and gains from business and profession’ whose total sales / gross receipts / turnover from business does not exceed Rs 1 crore or in case of profession does not exceed Rs 50 lakh. This threshold is to be seen in the financial year immediately preceding the financial year in which VDA is transferred.
Wadhwa says, “An individual (not having income from business and profession) will be required to deduct tax at the time of buying VDA, crypto if the payment exceeds Rs 50,000. An individual (not having income from business profession) will be required to deduct TDS if the turnover of business or profession in the previous financial year exceeds Rs 1 crore or Rs 50 lakh respectively The tax will be deducted if the payment made at the time of buying VDA exceeds Rs 50,000. will deduct TDS at the time of purchase of VDA, crypto if the payment exceeds Rs 10,000. ”
Do note that tax has to be deducted on the amount paid after excluding GST and any other levied charges.
Example of how TDS on VDA, crypto will be applicable at the time of buying, selling
Here is an example of how TDS will be applicable if an individual sells his / her VDA holdings.
Suppose Mr A bought bitcoins in the previous years. In August 2022, he decides to sell part of his holdings. Here is who will have to payTDS and how it will be deducted.
a) If the transaction is directly between buyer and seller
If the transfer of VDA is directly between the buyer and seller and no third-party (ie, Exchange) is involved, then the buyer of VDA will be required to deduct the tax on the amount paid (if it exceeds the specified amount).
b) If the transfer of VDA happens via an Exchange (VDA is not owned by the Exchange)
As the transfer of VDA happens via exchanges, the exchange will have to deduct tax at the time of transferring payment from buyer to the seller of the VDA.
c) If the transfer of VDA happens via Exchange and broker (VDA is not owned by the Exchange)
If the payment made at the time of sale of VDA is a transfer by an Exchange from the buyer to the seller and is done through a broker (broker is not the owner of the VDA), then TDS can be deducted either by Exchange or broker . To ensure that TDS is not deducted twice, there can be written agreement between the Exchange and the broker. The broker shall be responsible for deducting tax on such credit / payment. 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.
d) If the transfer of VDA happens via Exchange and VDA is owned by the Exchange
As there are only two parties involved, buyer and seller (ie, Exchange), then the buyer of VDA will be required to deduct tax at the time of making payment. However, it may happen that the buyer does not know that VDA is owned by the Exchange. In such a scenario, the Exchange may enter into a written agreement with the buyer or his broker that in 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 an assessee in default under section 201 of the Act for these transactions.
Referring to the above case, Wadhwa says, “At the time of buying a VDA, the buyer must ensure that TDS is being deducted by the Exchange at the time of making payment. If the Exchange does not deduct TDS or fails to deduct TDS, then buyer or broker can be held liable for failing to meet the obligation. ”
What is the TDS certificate that will be issued?
As per the notification issued by the CBDT, a new TDS certificate, ie, Form 16E, has been introduced. The buyer (who has deducted tax at the time of making payment) will be required to issue Form 16E to the seller of the VDA within 15 days from the due date of furnishing the challan-cum-statement in Form 26QE.
As per notification issued, the tax deducted at the time of sale of VDA must be deposited within 30 days from the end of the month in which tax is deducted. The tax will be deposited using challan-cum-statement in Form no 26QE.
Suppose the sale of VDA happened on July 20, 2022, via an Exchange. In a written agreement, the Exchange will be responsible for deducting tax at the time of making payment to the seller. The Exchange has to deposit tax with the government by August 30, 2022 and issue Form 16E to the seller by September 14, 2022.
What if payment is made in kind or two VDAs are exchanged?
Wadhwa says, “If an individual at the time of purchase of VDAs makes the payment in kind (say by offering certain services), then also a buyer is required to deduct the tax at the rate of 1%. Further, if there is an exchange of VDAs between two persons, then also tax has to be deducted.Tax will be deducted by both the persons.
For instance, Mr A buys Bitcoin from Mr. B in exchange for Ethereum. In this case, there is a transfer of VDA from both sides- transfer of Bitcoin by Mr. B and transfer of Ethereum by Mr. A. Accordingly, tax has to be deducted by both ie, Mr. A as well as Mr. B. Both parties will pay their respective taxes and share the evidence of payment with the other party. ”