The Finance Minister caused a stir in Budget 2022 by introducing taxation on cryptocurrencies and non-fungible tokens such as Virtual Digital Assets (VDAs). The provisions introduced a new tax regime for VDAs that tax the transfer of such properties at 30% (plus applicable surcharges and cesses) beginning in the financial year (FY) 2022-2023. The budget also introduced a new provision, section 194S, in the Income Tax Act, 1961 (ITA), which provides for tax deduction at source (TDS), which is deducted by the payer of consideration on transfer of property, which is more. Specified limit, with effect from 1 July 2022.
Accordingly, with effect from 1st July 2022, any person liable to pay to a resident, any consideration for transfer of VDA, shall deduct 1% of such consideration as income tax. Tax should be deducted at the time of credit of such amount to the resident’s account or at the time of payment, whichever is earlier. However, if the aggregate return during the financial year does not exceed Rs 10,000, no tax withholding is required. Where the consideration is payable by a ‘specified person’, the limit increases to INR 50,000 instead of INR 10,000. Person referred to herein means an individual or Hindu Undivided Family (HUF) who does not have any income under the head “Profits and gains of business or profession” in the financial year preceding the financial year in which the VDA is transferred. Where the individual or HUF carries on income under the head “Profits and gains of business or profession” in the previous financial year, he shall still be treated as a specified person if his total sales / gross receipts / turnover from the business carried on by him Does not exceed INR 1 Crore or in case of profession, it does not exceed INR 50 Lakhs.
There was considerable ambiguity in the process of tax withholding on transfer of VDA. The Central Board of Direct Taxes (CBDT) through its circulars dated 22nd June 2022 and 28th June 2022 has issued guidelines in this regard bringing the much needed clarity.
These circulars have taken cognizance of the fact that transactions on an exchange are likely to require TDS for VDA at multiple stages. Therefore, in order to remove the difficulties, the following are clarified in respect of transactions taking place in or in full on the Exchange:
The person responsible for paying such consideration is required to ensure that the tax required to be deducted, in respect of such consideration, has been paid before the issuance of the consideration. Therefore, the buyer should release the consideration in kind only if the seller provides proof of payment of such tax (eg, invoice details, etc.). Alternatively, tax can be deducted by the exchange on the basis of written agreement with the buyer/seller for both the aspects of the transaction.
The circulars further clarified that:
- Once tax is deducted under section 194S of ITA, no tax withholding will be required under section 194Q of ITA.
- TDS under this section shall be on “net” consideration excluding GST/fees levied by the deductor for rendering the service.
- In a transaction where the payment is being made through a payment gateway, the payment gateway shall not be required to deduct tax under section 194S of ITA if tax has already been deducted by the person responsible for such deduction.
- Though this clause is effective from 1st July 2022, the consideration for transfer of VDA trigger deduction under section 194S of ITA will be reckoned with effect from 1st April 2022. Therefore, if the value of consideration or the aggregate value payable for transfer of VDA to an individual during the financial year 2022-2023 (including the period up to June 30, 2022) exceeds INR 50,000 (or INR 10,000), section 194S of ITA VDA shall apply to any consideration for transfer of funds deposited or paid on or after 1 July. 2022. Consideration for transfer of VDA which has been deposited or paid before 1st July 2022 will not be subject to TDS.
While the requirement to deduct TDS on transfer of VDAs will ensure better tax compliance and reporting with respect to VDA transactions, the new circular provides some clarity on tax withholding provisions for VDAs to taxpayers. However, only time will tell whether all the challenges faced by the taxpayers are addressed or not.
Aarti Rawate is a partner of Deloitte India. Moushumi Nagarsenkar is the Director of Deloitte Haskins & Sales LLP.