Arjuna (Fictional Character): Krishna, a new section 194S had been introduced in this budget. Recently the Income tax Department has issued a circular regarding the same. What is Virtual Digital Asset (VDA) and what are the details in the circular?
Krishna (Fictional Character): Arjuna, From 1st July 2022, section 194S requires a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an amount equal to 1% of such sum as income tax thereon.
VDA in simple words means, crypto currencies (Bitcoin, Ethereum, etc) and NFT’s are covered in this definition.
Arjuna (Fictional Character): Krishna, what are the transactions and who is required to deduct tax when the transfer of VDA is made?
Krishna (Fictional Character): Arjuna, this section requires the person who is paying the consideration to deduct tax, following are the cases in which TDS will be deducted:
1. In case of Peer-to-Peer transaction i.e., transactions between buyer and seller where crypto exchange platform acts as a intermediary, TDS will be deducted by buyer of the seller, since the consideration is paid directly by the buyer to the seller.
2. In case where the consideration is paid by buyer to the exchange and exchange pays to the seller, then:
a. If seller is the owner of the VDA then exchange will deduct TDS of the seller.
b. If exchange is the owner of the VDA, then the exchange may enter into written agreement with the buyer that the exchange will pay the tax and in such a case the exchange is required to show all the transactions in his income tax return.
3. In case where the consideration is in kind, for example: Mr. A purchases Bitcoin from Mr. B by paying in Ethereum coin. Here, Mr. A is selling Ethereum and buying Bitcoin and Mr. B is buying Ethereum and selling Bitcoin hence both A and B are buyers and sellers. Therefore, the exchange will deduct tax of both A and B. In the above case, 1% of Bitcoin and 1% of Ethereum will be deducted by the exchange at the time of trading and it will be converted into INR at 00:00 hours based on the market rate existing at that time. When exchange is converting the cryptocurrency into INR it will not be considered as a sale and there will be no TDS.
Arjuna (Fictional Character): Krishna, what are the cases mentioned in the circular where tax deduction is not required under section 194S?
Krishna (Fictional Character): Arjuna, TDS under 194S would not be applicable in the following cases:
1. Where the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed Rs. 50,000 during the financial year, Or,
2. Where the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed Rs. 10,000 during the financial year.
3. It is also clarified that once TDS has been deducted by the person making payment, the payment gateway through which the person is making payment is not required to deduct tax under 194S.
4. No TDS when a person deposits or withdraws money from his account with the exchange.
Arjuna (Fictional Character): Krishna, what one should learn from this?
Krishna (Fictional Character): Arjuna, Trading of cryptocurrency started from year 2012-2013, from so many years this sector was unorganised and there was no way for government to tax those transactions, with the introduction of this section it is an attempt by the government to bring this sector into the tax ambit, now there is 30% tax on gain on sale of VDA’s and 1% TDS on purchase and sale. When this section was introduced in the budget there were many issues raised as to the applicability of this section, from this circular most of the issues are now resolved and now it is clear that the successful implementation of this section lies in the hands of the exchanges.
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