Crypto TDS: How TDS on crypto and virtual digital assets will work from tomorrow
What does the law say about TDS on VDA, crypto?
Under the new law, the buyer of a virtual digital asset (VDA) is required to deduct 1% of the amount paid to the seller (resident of India) as income tax withheld at source (TDS). Tax must be deducted when crediting the amount or when paying to the resident individual, whichever comes first. Tax will only be deducted if amount paid exceeds specified limit, CBDT said
CPA Naveen Wadhwa, DGM, Taxmann.com says: “Effective July 1, 2022, anyone (resident individual, non-resident individual, or Exchange) making a payment to a resident individual at the time of purchasing crypto , VDA or NFT (as notified by the Government), will be required to deduct TDS from the amount paid at the rate of 1%.TDS on VDA will be applicable under Section 194S of the Income Tax Act 1961 on income.”
If the PAN of the contributor (seller) is not available, then the tax at the time of the transfer of the ARV will be deducted at the rate of 20%. Also, if a person has not filed their tax return, TDS will be deducted at a higher rate of 5% (compared to the normal rate of 1%), if the payer is not a specified person.
When will TDS on VDA, crypto be applicable?
In accordance with the circular issued by CBDT, the TDS on the transfer of VDA, crypto will be applicable if:
a) If the amount paid (solely or on an aggregate basis) by the “specified person” (purchaser) exceeds Rs 50,000 during the financial year; Where
b) The amount paid (solely or on aggregate basis) by any other person/purchaser (other than “specified person” as mentioned above) exceeds Rs 10,000 during the financial year.
What is a “specified person”?
a) A Hindu Undivided Individual or Family (HUF) who has no income under the heading “Profits and Gains from Business and Profession” and
b) An individual or HUF having an income under the heading “profits and gains from business and profession” whose total sales/gross receipts/turnover does not exceed Rs 1 crore or in case of profession does not exceed not Rs 50 lakh. This threshold must be recognized in the year immediately preceding the year in which the ARV is transferred.
Wadhwa says, “An individual (having no income from business and occupation) will be required to deduct tax at the time of purchasing VDA, crypto if the payment exceeds Rs.50,000. An individual (having a business income) will be required to deduct TDS if the turnover of the 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 purchase of VDA exceeds Rs.50,000. Any other person (e.g. Company) will deduct TDS at the time of purchase of VDA, crypto if the payment exceeds Rs.10,000.”
Note that tax must be deducted from the amount paid after excluding GST and any other fees collected. Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India, said: “It has been clarified that where tax is deducted under the provisions of the VDA, no tax shall be deducted in view of the provisions relating to the purchase of goods (without going into the question of whether VDAs are goods or not). The tax is to be deducted only on the net amount excluding charges and GST.”
Example of how TDS on VDA, crypto will be applicable when buying, selling
Here is an example of how TDS will apply if an individual sells their VDA holdings.
Suppose Mr. A has purchased bitcoins in previous years. In August 2022, he decides to sell part of his holdings. Here is who will have to pay the TDS and how it will be deducted.
a) If the transaction is directly between the buyer and the seller
If the VDA transfer is directly between buyer and seller and no third party (i.e. Exchange) is involved, the VDA buyer will be required to deduct tax from the amount paid (if it exceeds the specified amount). This is further clarified by the circular issued by CBDT on June 28, 2022. In accordance with the circular dated June 28, 2022, the purchaser of the VDA is required to deduct tax and provide a quarterly statement under Form 26Q for all such transactions. . For a specific person, the 26QE form has been introduced.
b) If the VDA transfer is done through an exchange (the VDA does not belong to the exchange)
Since the transfer of VDAs is done through exchanges, the exchange will need to deduct the tax at the time of transfer from the buyer’s payment to the seller of the VDA.
c) If the VDA transfer happens through Exchange and a broker (VDA is not owned by Exchange)
If the payment made at the time of the sale of the VDA is a transfer by an exchange from the buyer to the seller and is made through a broker (the broker is not the owner of the VDA), then the TDS can be deducted either by the Exchange or by the broker. To ensure that the TDS is not deducted twice, there may be a written agreement between the exchange and the broker. The broker will be responsible for deducting tax from this credit/payment. The Exchange would be required to furnish a quarterly statement (on Form No. 26QF) for all such quarterly transactions on or before the due date prescribed in the Income Tax Rules 1962.
d) If VDA transfer occurs through Exchange and VDA is owned by Exchange
Since there are only two parties involved, the buyer and the seller (i.e. Exchange), the VDA buyer will need to deduct the tax at checkout. However, it may happen that the buyer does not know that the VDA belongs to the Exchange. In such a scenario, the Exchange may enter into a written agreement with the buyer or its broker that, in all such transactions, the Exchange would pay the tax on or before the due date for that quarter.
The Exchange would be required to furnish a quarterly statement (on Form No. 26QF) for all such transactions for the quarter no later than the due date prescribed in the Income Tax Rules 1962. The Exchange would also required to provide his income tax return and all such transactions must be included in this return. If these conditions are met, the buyer or his broker would not be held as appraised in default under section 201 of the Act for these transactions.
Referring to the above case, Wadhwa says, “At the time of purchasing a VDA, the buyer should ensure that the TDS is deducted by the Exchange at the time of payment. If the Exchange fails to deduct the TDS or fails to deduct the TDS, then the buyer or broker may be held responsible for the breach of obligation.”
Which TDS certificate will be issued?
In accordance with the notification issued by the CBDT, a new TDS certificate, i.e. Form 16E, has been introduced. The buyer (who deducted the tax at the time of payment) shall issue the Form 16E to the seller of the VDA within 15 days from the due date for providing the statement of dispute on the Form 26QE.
Per the notification issued, the tax deducted on the sale of VDAs must be filed within 30 days of the end of the month in which the tax is deducted. The tax will be filed using a challan-cum statement in Form No. 26QE.
Suppose the sale of VDA took place on July 20, 2022 via an exchange. In a written agreement, the Exchange will be responsible for deducting the tax at the time of payment to the seller. The Exchange must file the tax with the government by August 30, 2022 and issue Form 16E to the seller by September 14, 2022.
What happens if the payment is made in kind or if two VDAs are exchanged?
Wadhwa says, “If an individual at the time of purchase of VDA makes payment in kind (e.g. offering certain services), then a buyer is also required to deduct tax at the rate of 1%. Additionally, if there is an exchange of VDA between two persons, the tax must also be deducted. The tax will be deducted by both persons.”
The circular dated June 28, 2022 further clarified that the buyer must ensure that the tax to be deducted has been deducted and paid before making payment to the seller. This applies if the payment was made in kind or if the exchange of ADV took place.
For example, Mr. A buys Bitcoin from Mr. B in exchange for Ethereum. In this case, there is a VDA transfer on both sides – Bitcoin transfer by Mr. B and Ethereum transfer by MA. Accordingly, tax has to be deducted by both, i.e. M .A as well as MB Both parties will pay their respective fees and share proof of payment with the other party.”
More details needed
Badala adds, “Where payment is facilitated through a payment gateway, the payment gateway is required to obtain an undertaking that the payer has deducted the tax. The monetary threshold for applicability of the TDS provisions of Rs. 10,000 ( or Rs. 50,000 in case of specified payment persons) is to be seen from April 1, 2022 and not from July 1, 2022 when the provisions of the FT come into force The guidelines clarify many aspects, some doubts still remain.It is not clear how the buyer who is buying VDAs on the exchange will know whether the exchange is the owner of the VDA or someone else. exchange/s may find it convenient to keep inventory and agree with the buyer that they will meet the tax liability on a quarterly basis Another doubt relates to the obligation of payment gateways – payment gateways do not are only facilitators in the payment process ment; they do not in themselves incur any liability of their own. king of payers seems expensive. Regarding the clarification that TDS should be made on the net consideration (excluding GST and fees), there seems to be an error as the guidelines mention that GST/fees “taken by the deductor” should be excluded – the point is that the GST/fees are ‘levied by the stock exchange/brokers’.”