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.
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