Vide Indian Union Budget of 2022 a new tax regime has been introduced for taxing Virtual Digital Assets (“VDA”) in India with effect April 1, 2022. A concomitant provision under Section 194S of the Income-tax Act, 1961 (“the Act’) as regards Tax Deduction at Source (“TDS”) has now become effective from July 1, 2022. Since the introduction of this new tax regime, the Indian crypto market has witnessed a sharp decline, which is also attributable to the global trends in relation to crypto trade. From the perspective of the new tax regime in India, the biggest concern is the high rate of tax of 30%. Further, an equally concerning aspect has been the modalities in which the TDS provisions would be effectuated.
TDS provisions as introduced in Feb of 2022 (though made effective from July 1, 2022) cast an obligation directly cast obligation on the buyer of VDA to deduct tax at the rate of 1% at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier. However, at that stage it was unclear whether crypto exchanges would play any rule in facilitating such TDS, especially in cases where they do not own the VDA itself but merely facilitated the trade of such VDA.
Now, at the cusp of the TDS provisions becoming effective from July 1, 2022, the CBDT has issued certain important guidelines in the form of Circular No. 13 of 2022 dated June 22, 2022 for transactions conducted on or through an Exchange (“Guidelines”), as well as Circular No. 14 of 2022 (“Circular”) for other transactions. The Guidelines specifically clarify as regards the obligations and roles that the Exchange can play as regards discharging the TDS, while recognizing the practical difficulties for crypto buyer to determine whether the VDA being transferred is being owned by a seller resident in India or otherwise, or by the exchange and thus determine, his/her liability do deduct TDS. In the parallel, the Government has also vide Notifications dated June 21, 2022 and June 30, 2022, amended the existing Form 26Qs and introduced new Forms 16E, 26QE and 26QF in relation to the underlying reporting requirements connected with the TDS.
The below table summarises the key aspects which have been clarified thereto:
||Clarification issued by CBDT
||Where VDA is transferred in Cash
||Where Exchange does not own the VDA
||Where no broker involved
||Tax may be deducted only by the Exchange which is crediting or making payment to the seller (owner of the VDA being transferred).
||Where broker is the Seller (owner of VDA)
||The language of the Circular suggests that in this type of transaction, there would be a TDS liability at both legs:
(i) When exchange pays to the broker, and
(ii) When broker pays to the seller.
||Where broker is not the Seller
- The responsibility to deduct tax shall be on both the Exchange and the broker.
- However, if there is a written agreement between the Exchange and the broker, that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax .
- The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions on a quarterly basis
||Where Exchange owns the VDA
||In all cases
- While the primary responsibility 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 buyer or his broker that, in regard to all such transactions, the Exchange would be paying the tax on or before the due date for that quarter.
- The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions.
- The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return.
||Where VDA is transferred in exchange for another VDA
||In all cases
- It is clarified that in such cases of exchange of VDA, ordinarily, both, the seller and buyer would need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged.
- However, as an alternate mechanism, the Exchange can deduct TDS on both legs of the transaction and pay to Government and report about both the TDS deducted on both legs in the Form 26QF.
- If the Exchange deducts taxes for both legs of transaction, the buyer and seller will not be independently required to ensure that the TDS required to be deducted has been paid before releasing such consideration
Through the said Guidelines and Circular, the Government has also clarified as regards the below aspects.
- No TDS under Section 194Q: Once tax is deducted under Section 194S, tax would not be required to be deducted under Section 194Q of the Income-tax Act, 1961 (which deals with TDS applicable on sale of goods)
- TDS on net amount: TDS shall be applicable on the net consideration after excluding GST or charges levied by the deductor for rendering services.
- Liability of Payment Gateways: Payment gateways will not be required to deduct tax under Section 194S on the transaction, if tax has already been deducted. To facilitate proper implementation, the payment gateway may take an undertaking from the deductor regarding deduction of tax.
- Applicability of Limits: Calculation of consideration for determining whether the specified thresholds (of INR 50,000 for specified persons or INR 10,000 otherwise) shall be counted from April 1, 2022. Hence, if the value or aggregate value of the consideration for transfer of VDA payable by a person exceeds fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23 (including the period up to June 30, 2022), the provision of Section 194S of the Act shall apply on any sum, representing consideration for transfer of VDA, credited or paid on or after July 1, 2022. Thus, any sum which has been credited or paid before July 1, 2022 would not be subjected to tax deduction under Section 194S of the Act.
Some Noteworthy Aspects:
- The Guidelines have been issued under sub-section (6) of Section 194S for removal of difficulties, which are binding on the Income-tax authorities and the person responsible for paying the consideration for transfer of VDA. It is therefore, strictly speaking, not obligatory for the Exchanges to opt into the alternative mechanisms of becoming responsible for TDS, as laid down in the Guidelines. However, practically, it may very well become an economic necessity for the Exchange to take on the burden of TDS to facilitate trade on its platform or application.
- It will be critical for Exchanges to enter into appropriately worded written agreements with the buyers, sellers and brokers (as applicable), clearly stipulating who will be obligated to deduct tax at source in the entire chain of transaction. Practically, it would also be important to include suitable indemnity clauses within such agreements.
- The Exchanges would also be required to compile all relevant data for reporting purposes. This will result in increase in administrative costs for the Exchanges.
- The Guidelines do not specifically clarify as regards its applicability to Exchanges located outside India. In the absence of any prescription one way or the other or any exclusion/ carve out for non-resident exchanges, a strict reading would suggest that the Guidelines will even apply in relation to exchanges located outside in India. For this purpose, they will have to obtain necessary Permanent Account Number (PAN)/ Tax Identification Number (TIN) in India.
- In the scenario of an exchange of VDA, the Guidelines specifically mandate both the “buyer” and “seller” to deduct TDS, but as an alternative mechanism, provides for an option for the Exchange to deduct 1% TDS for both legs of the transaction. The Guidelines however do not clarify as regards instances of exchange of VDA, where one of the parties is located outside India. Since the counter party is located outside India, ideally the exchange should deduct tax only in relation the party located resident in India. However, the Guidelines do not specifically clarify on this aspect.
- The Exchanges while taking the onus of discharging TDS, will also have to ascertain whether the consideration is paid by persons below the specified threshold (INR 10,000 generally and INR 50,000 for specified persons, which include individuals/Hindu Undivided Families [HUFs] who are required to get their accounts audited under the Act). This threshold is to be seen in the financial year immediately in the financial year in which the VDA is transferred. Practically, Exchanges would have to obtain necessary declarations/ certifications from the buyers as regards crossing of the said thresholds.
While the Guidelines provide alternatives for Exchanges to facilitate trade on its application or platform, it will result in substantial administrative cost for them, should they choose to bear the TDS obligation. There would also be requirement for the Exchanges to amend underlying contracts and terms and conditions, while incorporating suitable clauses. One will have to wait and examine the overall impact of the new tax regime, and specifically the TDS mechanisms, on the ‘crypto winter’ in the country.
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.