CBDT Circular for TDS on Crypto Transactions u/s 194S: Circular No. 13 of 2022
Taxation and TDS on crypto transactions, NFTs and other virtual digital assets in India created a buzz in the minds of the taxpayers and web3.0 enthusiasts. However, a transaction in Virtual Digital Assets (VDAs) involves multiple parties and not just the buyer and seller. It can include the Exchange, broker and payment gateways as well. How the TDS under section 194S would apply if all the above parties are involved in a transaction in VDA and who shall be responsible for deducting TDS in such case?
To clarify the above doubts and removal of difficulties, CBDT released Circular No. 13 of 2022 dated 22nd June 2022. Let’s understand the CBDT clarification on Section 194S.
CBDT Guidelines for TDS under Section 194S
Following are the detailed guidelines of CBDT for Section 194S TDS:
Question 1. Who is required to deduct tax when the transfer of VDA is taking place on or through an Exchange and payment is made by the purchaser to the Exchange (directly or through broker) and then from the Exchange it goes to seller directly or through the broker?
Answer: Section 194S requires the person responsible for making payment for the transfer of VDA to deduct TDS. However, in the above-mentioned scenario, there can be multiple stages in the transaction requiring the deduction of TDS u/s 194S. Therefore, the following clarification merits consideration in this regard:
(i) In a case where the transfer of VDA takes place on or through an Exchange and the VDA being transferred is owned by a person other than the Exchange:
In this case, the buyer will be making payment to the Exchange who would then transfer the payment to the seller directly or through the broker. Therefore, two scenarios are possible in this regard:
- Where payment is directly made to the seller: TDS u/s 194S can be deducted directly by the Exchange making payment to the seller of VDA (being the owner). However, if the broker is the owner of VDA, then he shall be the seller and, in such case, payment made by the exchange should be liable to TDS under section 194S.
- Where payment is made through a broker (who is not the owner): If the payment is made by the exchange to the seller through a broker, then both the exchange and the broker shall be responsible to deduct TDS u/s 194S. In such a case, if a written agreement is entered between the broker and the Exchange that the broker shall be deducting TDS, then the broker shall alone be responsible for the deduction of TDS. In such a case, the Exchange should furnish a quarterly statement in Form 26QF for all such transactions of the quarter on or before the due date.
(ii) In a case where the transfer of VDA takes place on or through an Exchange and the VDA being transferred is owned by such Exchange:
Here, the buyer shall be responsible for deducting TDS. However, the buyer may not know that the Exchange is the owner of such VDA thereby creating doubts in the minds of the buyers about whether they are liable to deduct TDS or not.
In this case, while the primary responsibility to deduct TDS rests with the buyer or his broker, the Exchange may enter into a written agreement with the buyer or his broker that in respect of such transactions, the Exchange would pay the TDS on or before the due date for such quarter. Further, the Exchange would be required to furnish a quarterly statement in Form 26QF for all such transactions of the quarter on or before the due date. The Exchange shall also furnish its income tax return disclosing all such transactions. If these conditions are complied with, then the buyer or his broker shall not be considered as an assessee in default u/s 201 for these transactions.
Question 2: Question no 1 was with respect to transactions where the consideration for transfer of VDA is not in kind. How will this operate in a situation where it is in kind or in exchange of another VDA?
Answer: Where the consideration for transfer of VDA is in kind or partly in cash and partly in kind and the cash portion is not sufficient to meet the TDS liability, then the person paying the consideration should ensure that the TDS required to be deducted has been paid before releasing such consideration.
Now, the following scenarios are possible in this situation:
- Exchange of one VDA with another directly
Where VDA ‘A’ has been exchanged with VDA ‘B’, then, both the persons undertaking the transaction shall be the buyers as well as sellers. Therefore, both the persons shall pay tax and show evidence thereof to the other person. This shall be reported in the TDS statement along with the challan number in Form 26Q. For specified persons, Form 26QE has been introduced.
- Exchange of one VDA with another through an Exchange
In this case, TDS may be deducted by the Exchange based on a written contractual agreement with the buyers and sellers. The Exchange shall deduct TDS for both the transactions and pay to the government. It shall be reported in Form 26Q. The buyer and seller shall not be required to independently follow the procedure prescribed under section 194S(1).
However, there might be a situation whereby when the exchange deducts TDS, the amount deducted is also in kind and needs to be converted to cash before paying to the government. In such cases, the following mechanism can be adopted by the Exchange:
- The Exchange shall deduct TDS under section 194S on both the VDAs exchanged. For instance, if Monero and Deso are exchanged, then the Exchange shall deduct TDS @ 1% on Monero and Deso and pay the net VDA to their buyers. The Exchange shall maintain a trail evidencing deduction of TDS on such transactions.
- The Exchange should execute a market order immediately to convert the TDS deducted in kind (1% of Monero and Deso respectively) to one of the primary VDAs (Bitcoin, Ethereum, USDT etc.) that can be converted to INR easily. This ensures that TDS in the form of non-primary VDA is converted to a primary VDA having a ready INR market. The Exchange shall maintain the time stamps of the timing of orders to ensure that the conversion is done immediately. In case the TDS is withheld in the form of primary VDA itself, then this step can be ignored.
- All the TDS in the form of primary VDA shall be accumulated throughout the day i.e., from 00:00 hours to 23:59 hours.
- The accumulated VDA shall be converted to INR at 00:00 hours based on the market rate existing at that time. The Exchanges shall place the market order at 00:00 hours for conversion of tax withheld as primary VDA into INR. The sell market orders should be on the basis of open buy orders in the market.
- The exchange shall maintain the quantity and price data for verification. Further, it should be verifiable from the system coding that conversion was held at the first available buy order based on the prevailing buy order book of the respective exchange at the time of conversion. Also, it has been clarified that as a practice, the Exchanges liquidating the VDAs shall be prohibited to be a buyer of such VDAs.
- Customers shall be issued a contract note specifying the amount of TDS withheld and the INR realised thereof.
- The TDS amount withheld and converted into INR shall be deposited to the government within the prescribed due dates.
No further TDS should be applicable for converting VDA into INR or for converting VDA into another VDA and then INR as per the above procedure.
Question 3: Whether the provision of section 194Q of the Act is also applicable on the transfer of VDA?
Answer: If TDS has been deducted under section 194S, then it should not be deducted under section 194Q.
Question 4: Whether the consideration for transfer of VDA shall be on a Gross basis after including GST/commission or it shall be on a “net basis” after exclusion of these items.?
Answer: TDS under section 194S should be deducted on the net value of consideration i.e., after deducting the GST and other charges levied by the deductor for rendering the service.
Question 5: In transactions where payment is being carried out through payment gateways, there may be tax deductions twice. To illustrate that a person ‘XYZ’ is required to make payment to the seller for the transfer of VDA. He makes payments of Rs. 1 lakh through digital platform of "ABC". On these facts liability to deduct tax under section 194S of the Act may fall on both "XYZ" and "ABC.” Is tax required to be deducted by both?
Answer: The payment gateway shall not be required to deduct TDS if it has been deducted by the person who is responsible to deduct the TDS. In the above case, ABC shall not be required to deduct TDS if XYZ has deducted the same. ABC may take an undertaking from XYZ regarding the deduction of TDS.
Question 6: Section 194S shall come into effect from the 1st July 2022. The liability to deduct tax under section 194S of the Act applies only when the value or aggregate value of the consideration for transfer of VDA exceeds Rs. 50,000 during the financial year in case of consideration being paid by a specified person and Rs. 10,000 in other cases. It is not clear how this limit of fifty thousand (or ten thousand) is to be computed?
Answer: The threshold limit of Rs. 50,000 is for the entire financial year. Therefore, the calculation for consideration of transfer of VDA shall be applicable from 1st April 2022. Thus, if the aggregate consideration for transfer of VDA payable by a person exceeds Rs. 50,000 (including for the period up to 30th June 2022), then Section 194S shall become applicable on any sum paid or credited on or after 1st July 2022.
Further, if the consideration has been paid or credited before 1st July 2022, then it should not be subject to TDS under section 194S. This is because section 194S applies at the time of credit or payment of consideration, whichever is earlier.
Above was the detailed explanation for the clarificatory CBDT circular for TDS u/s 194S. Contact your eAuditor Office now for any queries.
Author : Dipen
Date : 27-Jun-2022