CBDT Guidelines for TDS on the Virtual Digital Assets

In a move to levy 1% TDS on the virtual digital assents under section 194S of the Income Tax Act, 1961, the Central Board of Direct Taxes (CBDT) has issued guidelines applicable with effect from 1^st July 2022. The circular issued on Wednesday prescribes the guidelines for removing difficulties under sub-section (6) 0f section 194s of the income tax Act, 1961.

The new section mandates a person responsible for paying any sum to any resident by way of consideration for the transfer of a VDA to deduct an amount equal to 1% of such sum as income tax thereon. Must make tax deduction at the time of credit of such sum to the resident’s account or at the time of payment, whichever is earlier.

The Main Purposes of TDS on the Virtual Digital Assets

Following are the primary purpose of TDS on the Virtual Digital Assets:-

1. An individual or Hindu undivided family (HUF) has no income under the head “profit & gains of business or profession”.
2. An individual or Hindu undivided family (HUF) having income by the head “profits & gains of business or profession”, whose total sales/turnover/gross receipts from business carried on by him do not more than fifty lakh rupees. This approach is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.

TDS on the Virtual Digital Assets is not required to be made in the following case:

1. The consideration is payable by a described person, and the value or whole value of such consideration does not more than fifty thousand rupees during the financial year;
2. The consideration is payable by a person other than a specified person, and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.

In Which Cases is required TDS on the Virtual Digital Assets?

As per section 194S of the Act, any person responsible for paying any resident any sum by consideration for TDS on the Virtual Digital Assets is required to deduct tax. Thus, in a peer-to-peer (direct buyer to seller) transaction, the buyer (person paying the consideration) must deduct tax by section 194S of the Act. But, if the transaction is taking place on or by an Exchange, there is a possibility of tax deduction requirement under section 194S of the Act at multiple stages. Hence, to remove difficulties for transactions taking place on or through an Exchange, the following clarifications are issued:-

1. In a case where the convey of VDA takes place on or along an Exchange and the VDA being transferred is owned by a person other than the Exchange:-  in this case, the buyer would be crediting or making payment to the Exchange (directly or by broker). The exchange then would be required to credit the or make payment to the owner of the VDA being transferred, directly or by broker. Since there are multiple players, to remove the difficulty, it is clarified that:
2. may deduct tax under section 194S of the Act only by the Exchange, which is crediting or making payment to the seller (owner of the VDA being transferred). In a case where the broker owns the VDA, the broker is the seller. Hence, the amount of consideration credited to the broker by the exchange is also subject to tax deduction under section 194S of the Act.
3. In a case where the payment between exchange and the seller is through a broker (the broker is not the seller), the responsibility to deduct tax under section 194S of the income tax Act shall be on both the exchange & the broker. Anyway, if there is a written agreement between the exchange & the broker that the broker shall be deducting tax on such credit/payment, then the broker alone may deduct the tax under section 194S of the income tax Act. The exchange would be required to enhance a quarterly statement (in Form no 26QF) for all such quarter transactions on or before the due date prescribed in the Income-tax Rules, 1962^[1].
4. In a case where the transfer of Virtual Digital Assets takes place on or through an Exchange and the VDA such Exchange owns being transferred: in the case of multiple players. The buyer must deduct tax as per section 194S of the Act. However, there may be a practical issue as the buyer may not know whether or not the exchange owns the VDA being transferred. Hence, buyers may be genuine abound of its duty to deduct tax under section 194S of the Act. This trouble would also be there if the buyer bought VDA from an Exchange by a broker.
5. To remove this trouble, it is clarified that while the primary duty to deduct tax under section 194S of the Act, in this case, remains with the buyer or his broker, as an alternative, the exchange may enter into a written agreement with the regarding broker that regarding such transactions the exchange would be paying the tax before the deadline for that quarter.
6. The Exchange would be required to enhance a quarterly statement (in Form No. 26QF) for all such quarter transactions on or before the due date prescribed in the Income-tax Rules, 1962.
7. The Exchange would also be required to enhance its income tax return and must include all these transactions in such return. If these conditions were complied with, the buyer or his broker would not be held as assessee in default under section 201 of the Act for these transactions.

For this circular,-

(i) The word “Exchange” means any person that manages an application for Transferring of VDAs, which matches buy & sell trades and implements the same on its application.

(ii) The word “Broker” means any person that manages an application or platform for transferring VDAs and holds brokerage accounts or accounts in exchange for executing such trades.

Conclusion

“According to section 194S of the Act, any person responsible for paying any resident any sum by consideration for TDS on the Virtual Digital Assets is required to deduct tax. Thus, in a peer-to-peer (i.e. direct buyer to seller) transaction, the buyer (i.e. person paying the consideration) is required to deduct tax under section 194S of the Act,” the circular said. As long as the provision of section 194S of the Act register at the time of credit or payment (whichever is earlier) of any sum, act for consideration for transfer of VDA, such sum which has been credited before 1st July 2022 would not be subjected to tax deduction under section 194S of the Act.