What does the law say on VDA, TDS on crypto?
As per the new law, the buyer of Virtual Digital Assets (VDA) will have to deduct 1% of the amount paid to the seller (resident Indian). Income Tax Deduction at Source (TDS). Tax should be deducted at the time of credit of the amount or at the time of payment to the resident individual, whichever is earlier. CBDT said tax would be deducted only if the amount paid exceeds the specified limit.
Naveen Wadhwa, DGM Chartered Accountant, Taxman.com, says, “Effective July 1, 2022, any person (resident individual, non-resident person or exchange) pays to a resident individual while buying crypto, VDA or NFT (as is the case). notified by the Government) will be required to deduct TDS on the amount paid at the rate of 1%. TDS on VDA will be applicable under section 194S of the Income Tax Act, 1961.”
If PAN of the deductee (buyer) is not available, tax will be deducted at the rate of 20% at the time of transfer of VDA. Further, if a person has not filed his income tax return, TDS will be deducted at a higher rate of 5% (as against the normal rate of 1%) if the payer is not a specified person.
When will TDS be applicable on VDA, Crypto?
As per the circular issued by CBDT, TDS will be applicable on transfer of crypto to VDA if:
a) if the amount paid (on single or aggregate basis) by the ‘specified person’ (buyer) exceeds Rs.50,000 during the financial year; either
b) The amount (on individual or aggregate basis) paid by any other person/buyer (other than the ‘specified person’ mentioned above) during the financial year exceeds Rs.10,000.
Who is a ‘Specified Person’?
a) an individual or Hindu Undivided Family (HUF) having no income under the head ‘Profits and gains of business and profession’ and
b) an individual or HUF whose income under the head ‘Profits and gains from business and profession’ whose total sales/gross receipts/turnover from business does not exceed Rs 1 crore or does not exceed Rs 50 lakh in case of profession . This limit should be observed in the financial year immediately preceding the financial year in which the VDA is transferred.
Wadhwa says, “An individual (not having income from business and profession) will need to deduct tax while buying VDA, crypto if the payment exceeds Rs.50,000. An individual (having income from business profession) has to deduct TDS will be required if the turnover of business or profession in the previous financial year exceeds Rs 1 crore or Rs 50 lakh respectively. Tax will be deducted if the payment made at the time of purchase of VDA exceeds Rs 50,000. Any other person (eg company ) If the payment exceeds Rs 10,000, TDS will be deducted at the time of purchase of VDA, Crypto.
Note that tax is to be deducted on the amount paid excluding GST and any other charges levied. Sunil Badala, Partner & Head, Financial Services, Taxes, KPMG in India says, “It is clarified that where tax is deducted under VDA provisions, any Tax will not be required to be deducted (without including) the factor whether VDAs are goods or not. Tax is to be deducted only on the net amount excluding duty and GST.”
Example of how VDA, TDS on crypto will be applicable at the time of buying, selling
Here is an example how TDS will be applicable if a person sells his VDA holdings.
Suppose Mr. A bought bitcoins in previous years. In August 2022, he decided to sell a part of his holding. Here’s who needs to pay TDS and how it will be deducted.
a) If the transaction is directly between buyer and seller
If the transfer of VDA takes place directly between buyer and seller and no third-party (ie, exchange) is involved, the amount paid (if it exceeds the specified amount) to the buyer of VDA needs to be deducted. Will be This has been further clarified by the circular issued by the CBDT on June 28, 2022. As per the circular dated June 28, 2022, the buyer of VDA is required to furnish tax deduction and quarterly statement under Form 26Q for all such transactions. For the specified person, Form 26QE is introduced.
b) If the transfer of VDA is through Exchange (VDA is not owned by Exchange)
Since the transfer of VDA takes place through exchanges, the exchange has to deduct tax while transferring the payment from buyer to seller of VDA.
c) If the transfer of VDA is through Exchange and Broker (VDA is not owned by Exchange)
If the payment made at the time of sale of VDA is transfer from buyer to seller by an exchange and is made through a broker (the broker is not the owner of the VDA), TDS can be deducted by the exchange or the broker. , To ensure that TDS is not deducted twice, there may be a written agreement between the exchange and the broker. The broker will be responsible for deducting tax on such credit/payment. The Exchange shall 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, 1962.
d) If the transfer of VDA is through an exchange and the VDA is owned by the exchange
Since there are only two parties involved, the buyer and the seller (i.e., the exchange), then the buyer of the VDA will need to deduct tax while making the payment. However, it may happen that the buyer is not aware that the VDA is owned by the exchange. In such a scenario, the Exchange may enter into a written agreement with the Buyer or its broker that in all such transactions the Exchange shall pay tax for that quarter on or before the due date.
The Exchange shall 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, 1962. The exchange will also be required to present its earnings. The tax return and all these transactions should be included in such return. If these conditions are complied with, the buyer or his broker shall not be placed as an assessee in default under section 201 of the Act for these transactions.
Referring to the above case, Wadhwa says, “While buying VDA, the buyer should ensure that TDS is being deducted by the exchange while making the payment. If the exchange does not deduct TDS or fails to deduct TDS, then the buyer or the broker may be held liable for failing to meet the obligation.”
What is the TDS certificate that will be issued?
As per the notification issued by CBDT, a new TDS certificate i.e. Form 16E has been introduced. The buyer (who has deducted tax at the time of making payment) has to issue Form 16E to the seller of the VDA within 15 days from the due date of submission of invoice-cum-statement in Form 26QE.
As per the notification issued, the tax deducted at the time of sale of VDA should be deposited within 30 days from the end of the month in which the tax is deducted. Tax will be deposited using challan-cum-statement in Form No. 26QE.
Suppose the sale of VDA took place through an exchange on July 20, 2022. In a written agreement, the exchange will be responsible for deducting the tax while making the payment to the seller. The exchange has to deposit the tax with the government by August 30, 2022 and issue Form 16E to the seller by September 14, 2022.
What if payment is made in kind or two VDAs are exchanged?
Wadhwa says, “If a person pays in kind (such as by offering certain services) while purchasing a VDA, the buyer is also required to deduct tax at the rate of 1%. Further, if any two Exchange of VDA between persons, then tax will also have to be deducted. Tax will be deducted by both the persons.”
The circular dated June 28, 2022 has further clarified that before making payment to the seller, the buyer must ensure that the tax required for deduction has been deducted and paid. This is applicable if the payment is made in kind or the VDA is exchanged.
For example, Mr. A buys Bitcoin From Mr. B in exchange for Ethereum. In this case, there is a transfer of VDA from both parties—the transfer of bitcoin by Mr. B and the transfer of ethereum by Mr. A. Accordingly, tax is to be deducted by both the parties, i.e. Mr. A as well as Mr. B. Both the parties will pay their respective taxes and share the proof of payment with the other party.
further clarification needed
Badala says, “Where the payment facility is provided by the payment gateway, the payment gateway is required to obtain an undertaking that the payer has deducted tax. The monetary limit for applicability of TDS provisions is Rs.10,000 (or the specified amount). 50,000 in case of individuals) needs to be observed from 1st April 2022 and not from 1st July 2022 when TDS provisions come into force. The guidelines provide clarity on several aspects, some doubts still persist. It is not clear Buying a VDA on an exchange will reveal whether the exchange owns the VDA or someone else. Potentially, the exchange may be facilitated by holding the inventory and agreeing with the buyer that they will be liable for tax liability on a quarterly basis. There is one more doubt regarding the obligation of payment gateways – payment gateways are only facilitators in payment processing; they do not take any responsibility on their own. Expecting them to get the undertaking seems tough amongst the payers. Explanation. in regards to that teed CS needs to be done on net consideration (excluding GST and duties), appears to be an error as the guidelines mention GST / ‘duties levied by the deductor’ will be excluded – the fact that there are GST/duties ‘imposed by exchanges/brokers’.”