Definition:

According to section 2(47A) of The Income Tax Act 1961, virtual digital asset means

Ø  any information or code or number or token (not being Indian currency or foreign currency),

Ø   generated through cryptographic means or otherwise, by whatever name called,

Ø   providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account

Ø  including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

What is also include in above definition

Ø  a non-fungible token or any other token of similar nature, by whatever name called;

Ø  any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

What is not include in above Definition

As per the notification of 73 and 74 of 2022, the Central Government hereby notifies following virtual digital assets which shall be excluded from the definition of virtual digital asset:

ü  Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;

ü  Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;

ü  Subscription to websites or platforms or application.

Tax on income from virtual digital asset

As per Section 115BBH of the Act,

1.     Where the total income of an assessee includes any income from the transfer of any virtual digital asset, notwithstanding anything contained in any other provision of this Act,

The income-tax payable shall be the aggregate of:

a.     the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent

and

b.     The amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a)

 

2.     Notwithstanding anything contained in any other provision of this Act

a.     no deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1);

and

b.     no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

TDS implications in Income from virtual digital assets

Finance Act 2022 inserted a new section 194S in the Income-tax Act, 1961 (hereinafter referred to as “the Act”) with effect from 1st July 2022.

The new section mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an AMOUNT EQUAL TO 1% of such sum as income tax thereon.

 

The tax deduction is required to be made

at the time of credit of such sum to the account of the resident

or

at the time of payment, whichever is earlier.

This deduction is not required to be made in the following cases:-

       i.          The consideration is payable by a SPECIFIED PERSON and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year.

or

      ii.          The consideration is payable by any person other than a SPECIFIED PERSON and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.

Who is SPECIFIED PERSON

The following are defined as specified person for the purposes of this provision:

       i.          An individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession”;

and

     ii.          An individual or HUF having income under the head “profits and gains of business or profession”, whose total sales/gross receipts/turnover from business carried on by him does not exceed one crore rupee or in case of profession exercised by him does not exceed fifty lakh rupee.

Note: This threshold is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.

CBDT Guidelines

In the Circular number 13 of 2022 dated 22/06/2022 & 14 of 2022 dated 28/06/2022

·       The Central Board of Direct Taxes (CBDT) issue guidelines, for removal of difficulties, with the approval of the Central Government.

·       These guidelines are required to be laid before each House of Parliament and are binding on the income-tax authorities and the person responsible for paying the consideration for transfer of VDA.

·       Accordingly, in exercise of the power conferred by sub-section (6) of section 194S of the Act, CBDT hereby issues the following guidelines.

·       These guidelines will apply only in cases where transfer of VDA is taking place on or through an Exchange.

·       In other cases (like peer to peer and others) provisions of section 194S of the Act shall apply and so far as these guidelines are concerned clarifications provided only in Question 6 shall apply.

Guidelines Question

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: According to section 194S of the Act, any person who is responsible for paying to any resident any sum by way of consideration for transfer of VDA is required to deduct tax. Thus, in a peer to peer (i.e. direct buyer to seller) transaction, the buyer (i.e person paying the consideration) is required to deduct tax under section 194S of the Act.

However, if the transaction is taking place on or through an Exchange there is a possibility of tax deduction requirement under section 194S of the Act at multiple stages. Hence, in order to remove difficulties for transactions taking place on or through an Exchange, the following clarifications are issued:-

       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 buyer would be crediting or making payment to the Exchange (directly or through a broker). The Exchange then would be required to credit or make payment to the owner of VDA being transferred, either directly or through a broker. Since there are multiple players, to remove difficulty it is clarified that:

1.     Tax may be deducted under section 194S of the Act only by the Exchange which is crediting or making payment to the seller (owner of the VDA being transferred). In a case where broker owns the VDA, it is the broker who is the seller. Hence, the amount of consideration being credited or paid to the broker by the Exchange is also subject to tax deduction under section 194S of the Act.

2.     In a case where the credit/payment between Exchange and the seller is through a broker (and the broker is not seller), the responsibility to deduct tax under section 194S of the Act 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 under section 194S of the Act. The Exchange would be required to 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.

      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: In this case there are no multiple players. The buyer is required to deduct tax under section 194S of the Act. However, there 3 may be a practical issue as the buyer may not know whether the VDA being transferred is owned by the Exchange or not. Hence, there may be genuine doubt in the mind of buyer with regard to its responsibility to deduct tax under section 194S of the Act. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker. To remove this difficulty, it is clarified that 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 of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. If these conditions are complied with, the buyer or his broker would not be held as assessee in default under section 201 of the Act for these transactions.

For the purpose of this circular,-

(i)               The term “Exchange” means any person that operates an application or platform for transferring of VDAs, which matches buy and sell trades and executes the same on its application or platform.

(ii)             The term “Broker” means any person that operates an application or platform for transferring of VDAs and holds brokerage account/accounts with an Exchange for execution of such trades.

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: According to proviso to sub-section (1) of section 194S of the Act, there could be situations where the consideration is in kind or in exchange of another VDA or partly in kind and cash is not sufficient to meet the TDS liability. In these situations, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

In the above situation, the buyer will release the consideration in kind after seller provides proof of payment of such tax (e.g. Challan details etc.). In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged. This would then be required to be reported in TDS statement along with challan number. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced.

However, if the transaction is through an Exchange there is practical issue in implementing this provision. In order to address this practical issue and to remove difficulty, it is clarified that in such a situation, as an alternative, tax may be deducted by the Exchange. Such an 4 alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.

If such an alternative mechanism is exercised,

(i)               the Exchange would be required to deduct tax for both legs of the transactions and pay to the Government. In the Form 26Q it will, for the reasons explained before, need to report it as tax deducted on both legs of the transaction.

(ii)             the buyer and seller would not be independently required to follow the procedure prescribed in proviso to sub-section (1) of section 194S of the Act.

When the Exchange opts for deduction of tax under section 194S of the Act on such transactions, there is also a possibility that the tax amount deducted is also in kind and needs to be converted into cash before it can be deposited with the Government. In this regard, the following mechanism shall be adopted by the Exchange

(i)               At the time of transaction, the Exchange will deduct TDS in the pair being traded. For example, in case of trade for Monero to Deso, 1% of Monero and 1% Deso will be deducted as tax under section 194S of the Act by the Exchange and balance shall be transferred to the customer. The trail of transactions evidencing deduction of 1% of consideration for every VDA to VDA trade shall be maintained by the Exchange.

(ii)             The Exchanges shall immediately execute a market order for converting this tax deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will ensure that the tax deducted under section 194S of the Act in the form of non-primary VDAs like Deso/Monero is converted to an equivalent of primary VDAs which have a ready INR market. Time stamps of timing of orders to be maintained to ensure such conversion of VDAs withheld to be done on immediate basis by the Exchange. If the taxes are withheld in primary VDAs, this step would be ignored.

(iii)            All the tax deducted under section 194S of the Act in the form of primary VDAs {or converted into primary VDA under step (ii)} will be accumulated for the day. Time limit will be from 00:00 hours to 23:59 hours. VDA accumulation by the Exchange shall be verifiable from the trail of orders for VDA to VDA trades executed during the day.

(iv)            The accumulated balance of primary VDAs at 00.00 hours will be converted into INR based on the market rate existing at that time. In order to bring in consistency and to avoid discretion, the Exchanges are required to place market order at 00:00 hours for the tax withheld {or converted under step (ii)} in form of primary VDAs for conversion into INR. These sell market orders shall be executed based on the open buy orders in the market. Price and quantity data for every matched trade shall be maintained by the Exchange and shall be available for verification. It shall be verifiable from the system coding that the conversion into INR happened at the first available buy order based on the prevailing buy order book of the respective Exchange at the time of conversion. As a practice, the respective Exchange liquidating the VDA shall be prohibited to be a buyer for these VDAs.

(v)             Customer will be issued a contract note over email which will include the amount of tax withheld in kind under section 194S and the amount of INR realized from such tax withheld.

(vi)            The tax withheld in kind under section 194S of the Act and converted into INR by following the above procedure shall be deposited in the Government Account as per the time line and process given in the Income-tax Rules 1962.

It is clarified that there would not be any further TDS for converting the tax withheld in kind in the form of VDA into INR or from one VDA to another VDA and then into INR.

Question 3: Whether the provision of section 194Q of the Act is also applicable on transfer of VDA?

Answer Without going into the merit whether VDA is goods or not, it is clarified that once tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

Question 4: Whether the consideration for transfer of VDA shall be on Gross basis after including GST/commission or it shall be on “net basis” after exclusion of these items.

Answer: In order to remove difficulty, it is clarified that the tax required to be withheld under section 194S of the Act shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering service.

Question 5: In transactions where payment is being carried out through payment gateways, there may be tax deduction twice. To illustrate that a person ‘XYZ’ is required to make payment to the seller for transfer of VDA. He makes payment of one lakh rupees 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: In order to remove this difficulty, it is provided that in the above example, the payment gateway will not be required to deduct tax under section 194S of the Act on a transaction, if the tax has been deducted by the person (‘XYZ’) required to make deduction under section 194S of the Act. Hence, in the above example, if "XYZ" has deducted tax under section 194S of the Act on one lakh rupees, "ABC" will not be required to deduct tax under section 194S of the Act on the same transaction. To facilitate proper implementation, "ABC" may take an undertaking from "XYZ" regarding deduction of tax.

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 fifty thousand rupees during the financial year in case of consideration being paid by specified person and ten thousand rupees in other cases. It is not clear how this limit of fifty thousand (or ten thousand) is to be computed?

Answer: It is clarified that,-

(i)               Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to the financial year, calculation of consideration for transfer of VDA triggering deduction under section 194S of the Act shall be counted from 1st April, 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 30th June 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 1st July 2022.

(ii)             Since the provision of section 194S of the Act applies at the time of credit or payment (whichever is earlier) of any sum, representing consideration for transfer of VDA, such sum which has been credited or paid before 1st July 2022 would not be subjected to tax deduction under section 194S of the Act.

Question 7: Liability to deduct tax at source under section 194S of the Act when the consideration is other than in kind?

Answer: According to section 194S of the Act, any person who is responsible for paying to any resident any sum by way of consideration for transfer of VDA is required to deduct tax. Thus, in a peer to peer (i.e. buyer to seller without going through an Exchange) transaction, the buyer (i.e person paying the consideration) is required to deduct tax under section 194S of the Act. The tax so deducted is required to be deposited with Government in accordance with the time and procedure prescribed in the Act read with the relevant provisions of the Income-tax Rules, 1962.

After deduction, the deductor is required to furnish a quarterly statement (in Form No. 26Q) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. For specified person Form 26QE has been introduced.

It may be clarified that the TDS shall be on consideration for transfer of VDA less GST.

Question 8: Liability to deduct tax at source under section 194S of the Act when the consideration is in kind or in exchange of VDA?

Answer: According to the proviso to sub-section (1) of section 194S of the Act, there could be a situation where the consideration is in kind or in exchange of another VDA or partly in kind and cash is not sufficient to meet the TDS liability. In this situation, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

Thus, the buyer will release the consideration in kind after seller provides proof of payment of such tax (e.g. challan details etc.). In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged. This would then be required to be reported in TDS statement along with challan number by both of them. This year Form 26Q has included provisions for reporting such transactions. For specified persons, Form 26QE has been introduced.

Question 9: Interplay between provision of section 194S and section 194Q

Answer: Without going into the merit whether VDA is goods or not, it is clarified that once tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

We hope you understand all the above concept if you have any doubt any of the above topic then you can asked from us on the info@fintaxliteracy.com email id.

Happy Learning!!!

 

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

 Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.

Introduction

As we know that taxation law in India are very complex especially Income tax law and As a person  from non finance background it is not easy to understand entire income tax word by word. So FinTax Literacy try to understand the easy understanding of income tax laws for an individual. So lets start

In india Taxation laws are divided into two section:

o   Direct Tax (i.e Income Tax & Tax on undisclosed foreign income and assets)

o   Indirect Tax (i.e GST, Custom Duty, etc)

Sources of Income Tax Laws

o        Income Tax Act, 1961:-  The levy of income-tax in India is governed by the Income-tax Act, 1961. In the entire blog, we shall briefly refer to this as the Act.

o        Income Tax Rule, 1962:- The Central Board of Direct Tax(CBDT) has empowered to make rules for carrying out the purposes of the above Act. So it is very important that these rules should also be study along with Act

o        Finance Act:- Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the Finance Act

The First Schedule to the Finance Act contains four parts which specify the rates of tax -

o   Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current Assessment Year. Accordingly, Part I of the First Schedule to the Finance (No. 2) Act, 2024 specifies the rates of tax for F.Y. 2023-24.

o   Part II specifies the rates at which tax is deductible at source for the current Financial Year. Accordingly, Part II of the First Schedule to the Finance Act, 2024 specifies the rates at which tax is deductible at source for F.Y. 2024-25

o   Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the head “Salaries” and computation of advance tax for F.Y. 2024-25 where the assessee exercises the option to shift out of the default tax regime provided under section 115BAC(1A).

o   Part IV gives the rules for computing net agricultural income.

o        Circulars & Notifications

Circulars

o   Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of certain provisions of the Act.

o   Circulars are issued for the guidance of the officers

and/or assessees.

o   The department is bound by the circulars. While such circulars are not binding on the assessees, they can take advantage of beneficial circulars.

 

Notifications

Notifications are issued by the Central Government to give effect to the provisions of the Act. The CBDT is also empowered  to make and amend  rules for the purposes of the Act by issue of notifications which are building on both department and assessees

o        Legal Decisions of Courts

o   Case Laws refer to decision given by courts. The study of case laws is an important and unavoidable part of the study of Income-tax law. It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues.

o   The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction.

Assessment year v/s Previous Year

o   Assessment Year(AY):- AY is the year (From 1^st April to 31^st March) in which persons are required to pay tax and file ITR(Income Tax Return).

o   Previous Year(PY):- PY is the year (From 1^st April to 31^st March) in which persons earn or received income from various sources or in which TDS has on such income.

For Example, Mr A a salaried individual received monthly salary of Rs. 1,00,000/- in April 2024 to Mar 2025.

So Mr A earned income in Financial year 2024-25 so it is called Previous Year and requied to file ITR and pay Tax in Financial Year 2025-26 so it is called Assessment Year.  

General Rule:

o   Income of Previous year (PY) is Taxable in Assessment Year(AY)

o   Exception to General Rule: Cases where income of PY is Taxable in PY itself

o Income of Non-Resident shipping business

o Income of Person leaves India permanently or for long duration.

o Income of discontinued business.

o Income of person trying to transfer his assets for avoiding tax.

o AOP/BOI/AJP formed for particular purpose

Person v/s Assessee

            Person:- Person include the following

o   Individual: such as Man Women

o   Hindu Undivided Family(HUF)

o   Firm: Such as Partnership Firm or Limited Liability Partnership

o   Company

o   AOP/BOI (Association of Person or Body of Individual)

o   Local Authority: Nagar Nigim, Muncipal Corporation

o   Artificial Juridical Person: Courts, Temples, University etc

Assessee: Assessee means a person by whom any tax or any other sum of money is payable under this Act.

In other Word, Person included every person whether he is required to pay tax or not under this act but Assessee included only those person who required to pay tax under this act.

For Example There are two person, Mr A whose Annual Income of Rs. 12,00,000/- and Mr. B whose Annual Income of Rs. 2,40,000/- and As per Income Tax Act , Every person required to pay tax if his total Income exceed Basic Exemption Limit(i.e above of Rs. 2,50,000)

Therefore Mr A and Mr. B both comes under the definition of person but only Mr A comes under the definition of Assessee.

We hope you understand all the above concept if you have any doubt any of the above topic then you can asked from us on the info@fintaxliteracy.com email id. In the next chapter we will going to understand Computaion of total Income & Tax Liablity and Tax rates applicable of various Assessee under the Income Tax Act, 1961.

Happy Learning!!!

 

Disclaimer:

The contents of this document are for information purposes only. This aims to enable public to have a quick and an easy access to information and do not purport to be legal documents.

 Viewers are advised to verify the content from Government Acts/Rules/Notifications etc.