Taxation on Virtual Digital Assets

As we all recollect that the Finance Act 2022 was passed with some changes to the Finance Bill introduced on February 1, 2022.

The Bill stated that a tax of 30% would be charged on income arising from Virtual Digital Assets w.e.f. April 1, 2022 and TDS @ 1% will become applicable w.e.f. July 1, 2022.

Pursuant to the above, the Central Board of Direct Taxes, Ministry of Finance, Department of Revenue, on June 22, 2022, came out with detailed guidelines for removal of difficulties under Section 194S(6) of the Income Tax Act, 1961.

Chapter XVII of the Income Tax Act, 1961 deals with provisions relating to collection and recovery of tax. A new Section (Section 194S) was introduced vide Finance Act, 2022 which provides for Payment on Transfer of Virtual Digital Assets. The said provision will become applicable for FY 2022-23 w.e.f. July 1, 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.

Provided that in a case where the consideration for transfer of virtual digital asset is:

(a) wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or

(b) partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax required to be deducted has been paid in respect of such consideration for the transfer of virtual digital asset.

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.

“Specified person” means a person,

• being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
• being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession
  
  

If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.

A new TDS certificate in Form16E has been introduced. The buyer who deducts tax at the time of making payment will be required to issue Form 16E to the seller of VDA within 15 days from the due date of furnishing the challan-cum-statement in Form26QE. 

It is pertinent to note that these guidelines will apply to cases where transfer of VDA is taking place on or through an Exchange and also other transactions like peer to peer and others, where the provisions of section 194S of the Act shall apply to the extent and in the manner as clarified by the CBDT.

Primarily the responsibility to deduct tax is of the buyer. Therefore in peer to peer transactions, the buyer is required to deduct tax. However, when the trades are being conducted through an exchange, the responsibility to deduct tax will vary depending on the parties involved (Buyer, Exchange or Broker) and the ownership of the VDA. 

While TDS on loss making transactions is refundable, the inability to offset crypto losses against gains still needs to be addressed. The clarification issued by CBDT has come as a breather to the investors who are now in a position to invest and trade. This initiative by the Government will go a long way in creating an ecosystem for virtual digital assets which will be beneficial to all stakeholders.