Rules on TDS provision on Virtual Digital Assets(VDA)

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Recently ,The Central Board of Direct Taxes (CBDT) issued detailed guidelines on the Tax Deducted at Source (TDS) rule for Virtual Digital Assets (VDAs) such as cryptocurrencies .

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• It laid down the various scenarios under which tax would be applicable and on whom the onus of deduction would lie.
• The new rules of TDS on VDA and crypto will come into effect from July 1, 2022.

Major Highlights 

• Deduction 
  • Any person (resident individual, non-resident individual or Exchange) making payment to resident individual at the time of buying crypto, VDA or NFT (as notified by the govt), will be required to deduct TDS on the amount paid at the rate of 1%. 
  • The TDS on VDA will be applicable under section 194S of the Income-tax Act, 1961.
    • The Finance Act, 2022 introduced Section 194S in The Income Tax Act, 1961, under which a TDS of 1 per cent will be levied on the transfer of VDAs effective July 1 if the value of transactions exceeds Rs 10,000 in a year.
  • The tax is required to be deducted at the time of credit of amount or at the time of payment to the resident individual, whichever is earlier. 
• Limit 
  • The tax will be deducted only if the amount paid exceeds the specified limit.

• If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. 
• Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.

• Role of third-party
  • The Exchange or third-party would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the income-tax rules. 
  • 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.

• New TDS certificate Form16E 
  • A new TDS certificate, i.e., Form 16E, has been introduced. 
  • The buyer (who has deducted tax at the time of making payment) will be required to issue Form 16E to the seller of the VDA within 15 days from the due date of furnishing the challan-cum-statement in Form 26QE.
  • Moreover, the tax deducted at the time of sale of VDA must be deposited within 30 days from the end of the month in which tax is deducted. The tax will be deposited using challan-cum-statement in Form 26QE.

• Defining 
  • The CBDT has defined four primary VDAs — bitcoin, ether, USD Tether, and USD Coin — for the purpose of tax deduction on lesser known cryptocurrencies.

Applicability 

• the TDS on transfer of VDA, crypto will be applicable if:
  •  If the amount paid (single or on aggregate basis) by the ‘specified person’ (buyer) exceeds Rs 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 Rs 10,000 during the financial year.

Significance 

• It will help the tax department to trace the VDA transactions. 
• It will also increase the compliance burden on taxpayers. 
• It  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.
• It would be helpful to the buyers and sellers both since they can enter into contracts with the exchange for passing the responsibility to deduct tax on their behalf in VDA to VDA transfers or otherwise as well.

Source:ET