India’s TDS on Crypto Assets: Here’s How it Will Work from July 1, 2022
India’s income tax department recently clarified the conditions for charging TDS on crypto assets and other virtual digital assets. From July 1, TDS of one percent will be levied on payments towards virtual digital assets beyond INR 10,000 in a year. The exchanges will deduct the tax from buyers and deposit the same to the government within 30 days.
The Central Board of Direct Taxes (CBDT), India’s apex department for direct tax, has issued clarifications on the decision to levy a one percent tax deduction at source (TDS) on cryptocurrency and other virtual digital assets (VDAs). The rules come into effect from July 1 and have specified the compliance timelines for parties to a virtual digital asset transaction when reporting to the tax authority, including stipulating the date of the transaction and the mode of payment.
The one percent TDS was announced shortly after the government announced a 30 percent tax on crypto transactions in February this year.
As per the CBDT notification, the new Section 194S of Income-tax Act, 1961 mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a VDA, to deduct an amount equal to one percent of such sum as income tax thereon. This means that the primary responsibility for deducting TDS remains with the buyer who pays a consideration in return for the virtual digital asset.
The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier.
When will the TDS on crypto assets be applicable?
As per the CBDT circular, the TDS on transfer of VDA and cryptocurrency will be applicable in the following cases:
- If the amount paid (single or on aggregate basis) by the ‘specified person’ (buyer) exceeds INR 50,000 during the financial year; or
- The amount paid (single or on aggregate basis) by any other person/buyer (other than ‘specified person’ as mentioned above) exceeds INR 10,000 during the financial year.
It is further clarified that the tax required to be withheld under Section 194S of the Income-tax Act shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.
Who is a specified person?
As per the tax department guidelines, a specified person refers to:
- An individual or Hindu Undivided Family (HUF), who does not have any income under the head ‘profit and gains from business and profession’, and
- An individual or HUF having income under the head ‘profit and gains from business and profession’. In case of business, such persons’ total sales, gross receipts or turnover from business must not exceed INR 10 million. In case of professionals, such income must not exceed INR 5 million. This income threshold is to be assessed for the financial year immediately preceding the financial year in which VDA is transferred.
Will the tax be deducted at buyer’s or seller’s end?
As per the CBDT circular, if the buyer has deducted tax under Section 194S of the Income-tax Act, the seller will not be required to deduct it on the same transaction. To facilitate the proper implementation, the seller may take an undertaking from buyer regarding the deduction of tax.
Any sum deducted under Section 194S is to be paid to the central government within 30 days from the end of the month in which the deduction was made. The person responsible for deduction of tax should give a TDS certificate to the payee within 15 days from the due date for reporting it to the government, according to the new rules.
How will TDS be deducted in case of transfer through exchanges?
Transfer through exchange but VDA owned by a person other than the exchange: In this case, tax may be deducted under Section 194S of the Act only by the exchange that is crediting or making payment to the seller. In a case where the credit or payment between exchange and the seller is done through a broker (and the broker is not seller), the responsibility to deduct tax under Section 194S of the Act shall be on both the exchange and the broker. The exchange would be required to furnish a quarterly statement (Form 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.
Transfer of VDA through an exchange and the VDA being transferred is owned by such exchange: In this case, the primary responsibility to deduct tax under Section 194S of the Income-tax Act rests with the buyer or their broker. Alternatively, the exchange may enter into a written agreement with the buyer or their broker that in regard to all such transactions, the exchange would pay the tax on or before the due date for that quarter. The exchange would also be required to furnish its income tax return and all these transactions must be included in such return.
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