The Central Board of Direct Taxes recently issued Circular No. 13 of 2022 dated June 22 providing clarification in relation to applicability of Tax Deduction at Source (TDS) provisions on transfer of Virtual Digital Assets (VDA) under S.194S of Income-tax Act, 1961 (IT Act). The provisions under S.194S will be effective from July 1, 2022. The Circular has issued the following clarifications:
Liability to deduct tax
In a peer to peer (i.e. direct buyer to seller) transaction - Buyer (i.e person paying the consideration) is required to deduct tax under S. 194S.
If transaction is executed on or through an Exchange and VDA is owned by a person other than the Exchange –
- Tax may be deducted u/s 194S only by the Exchange which is crediting or making payment to the seller (owner of the VDA).
- In 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 TDS.
- In case where the credit/payment between Exchange and the seller is through a broker (and the broker is not seller), the responsibility of tax deduction will 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 tax u/s 194S. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) of all such transactions in a quarter on or before the due date prescribed in Income-tax Rules, 1962.
In transaction is executed on or through an Exchange and VDA is owned by the Exchange – Buyer is required to deduct tax u/s 194S. However, the buyer may not know who owns the VDA. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker. Hence, it has been clarified that while the primary responsibility to deduct tax u/s 194S 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 tax on or before the due date. The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions in a quarter on or before the due date prescribed. 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.
Liability to deduct tax in case where the consideration for transfer of VDA is in kind or in exchange of another VDA
In such cases, the person responsible for paying consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration. In this situation, buyer will release the consideration in kind after seller provides proof of payment of such tax (e.g. Challan details etc.). In case of exchange of one VDA (say A) with another VDA (say 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.
If the transaction is through an Exchange – It has been clarified that the tax may be deducted by the Exchange. This alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.
If such an alternative mechanism is exercised,
- 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.
- The buyer and seller would not be independently required to follow the procedure prescribed in proviso to sub-section (1) of S.194S.
When the Exchange opts for deduction of tax u/s 194S 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 such cases the following mechanism will be adopted by the Exchange:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Applicability of S. 194Q on transfer of VDA
If tax is deducted u/s 194S, no tax would be required to be deducted u/s 194Q.
Consideration for transfer of VDA: Whether on gross basis after including GST/commission or it shall be on “net basis” after exclusion of these items?
TDS under S. 194S shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.
TDS on transactions where payment is made through payment gateways
Payment gateways will not be required to deduct tax u/s 194S on a transaction, if tax has been deducted by the person required to make deduction u/s 194S.
Calculation of limit of fifty thousand (or ten thousand) provided in S. 194S
If the value/ aggregate value of consideration for transfer of VDA payable by a person exceeds fifty thousand rupees (or ten thousand rupees) during financial year 2022-23 (including the period up to 30th June 2022), S. 194S shall apply on any sum, representing consideration for transfer of VDA, credited or paid on or after 1st July 2022. Any sum credited or paid before 1st July 2022 would not be subjected to tax deduction under S. 194S of the Act.
We hope you will the update useful. Copy of the Circular is attached for your reference.
