Guidelines on TDS on transfer of Virtual Digital Assets

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.

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.

• 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.