Given the popularity of virtual digital assets such as cryptos among the young, tech-savvy generation, they are attracting increasing regulatory interest.
Union Budget 2022 marked a milestone since the government imposed a 30% tax (plus surcharge and levy) on VDAs, bringing these high-risk assets under the official tax net. Please note that rewards points, gift vouchers/cards, mileage points, etc. used to obtain goods or services for discount/reward purposes, including subscription to websites, are not considered ARVs under income tax law. Section 194S of the Income Tax Act requires the buyer to pay 1% TDS for each transaction beginning July 1.
The nature of TDS means that low capital crypto traders need to handle this carefully. The 30% global tax also raises the break-even point for VDA investors and speculators. There were many concerns and questions due to ambiguity regarding operational terms. In order to clarify these doubts, CBDT issued two circulars (June 22 and June 28). Here is an overview.
Who deducts tax, who does not
Section 194S requires the buyer to make a tax deduction at the time of payment to the seller, if the total value to be paid exceeds ₹50,000 in a fiscal year. For transactions below the threshold, the section does not apply.
These provisions would apply to certain “Specified Persons” and these are Hindu Undivided Individuals/Families (HUFs) who have no income under the heading “Profits and Gains of a Business or Profession” .
Individual/HUF with income under “profits and earnings from business or profession” but whose gross turnover does not exceed Rs 1 crore (Rs 50 lakh in case of profession), they will also be considered as specified persons. Thresholds trigger in the fiscal year immediately preceding the year of the VDA transfer.
The timeframe for the ARV transfer value calculation is April 2022 to March 2023. Since the threshold amount is for the entire fiscal year, the starting point for the period will be April 2022, even though the or transactions on or after July 1, 2022, will only be liable for TDS.
Foreign exchange transactions
Many VDA/crypto transactions are done through crypto exchanges. Where such VDA transfers take place via exchanges or brokers and the identity of the seller is not precisely known, the TDS will need to be deducted by the exchange/broker. But in this case, the broker cannot be the seller.
In the case of peer-to-peer transactions, where the transaction between the buyer and the seller does not fall under the exchange, the buyer must deduct the tax and deposit it with the government. The tax deductor must provide a quarterly return on Form 26Q and Form 26 QE for the persons specified.
Trade involving a cash/in-kind portion
Some crypto buyers and sellers settle VDA transactions so that payment is made in kind or in cash and in kind. Where the consideration is in cash and part-kind or in exchange for another crypto asset, the buyer must ensure that the tax has been paid before releasing payment to the seller. In such a case, the buyer can only release the payment after receiving the proof of payment, i.e. the tax claim details have been provided.
In the above case, both parties are buyers and sellers. For example, let’s say Rahul trades bitcoin for Ether with Vidya. Rahul becomes Ether buyer and Vidya is Bitcoin buyer or vice versa. Thus, the two will have to pay the tax on this transfer and provide each other with the proof so that the VDAs can then be exchanged.
If this is an exchange-routed transaction, TDS is responsible for the exchange based on a written contractual agreement between the buyers/sellers.
GST/commission, payment gateway
The CBDT clarified that the TDS will be based on the net amount and not the gross amount, i.e. excluding GST/fees etc. is ₹1 lakh. Thus, the price of the asset is effectively ₹84,745.
If the TDS is to be deducted on ₹1 lakh, the TDS will be ₹1,000 which will include tax on the 18% GST already charged. But on a net basis, TDS on ₹84,745 will be ₹847.45.
There have been concerns that in transactions where payment is made through payment gateways, there may be double TDS. But CBDT clarified the process so that TDS is not deducted twice. For example, Sathya is required to make a payment for the transfer of certain Ether cryptocurrencies.
Now, if Sathya deducted the tax before making a transaction on an “ABC” digital platform, then ABC does not need to deduct the tax. To facilitate proper implementation, ABC may make a Sathya Pledge.
July 02, 2022