Decoding Section 194S of the Income-tax Act, 1961 (ITA)

First things first, virtual digital assets (VDAs) means any number, code, information, or token (not being Indian or any foreign currency), generated through digital representation or cryptographic means. This definition is as per the new clause (47A) under Section 2 of the Income-tax Act, 1961 (ITA) in the Finance Act, 2022. 

In addition, the Finance Act, 2022, introduced the provision for tax on all gains from the sale of cryptocurrencies, VDAs, and non-fungible tokens (NFTs), which will be taxed at a flat rate of 30% (plus cess and surcharges) under Section 115-BBH of the ITA. This will be effective from April 1, 2022.

It is to be noted that cryptocurrencies or NFTs are traded on crypto exchanges, which may or may not exist in India. Also, there may not be any direct interaction between the buyer and the seller, as these exchanges facilitate the transactions directly.

Finance Act, 2022: Section 194S

The Finance Act, 2022 introduced a new Section 194S, which relates to tax deducted at source (TDS) on the transfer of VDAs. As per this, the person making a payment on the purchase of cryptocurrencies or NFTs shall be responsible for charging a TDS at the rate of 1% of the value of the VDAs. However, if the deductee does not furnish his/her permanent account number (PAN) to the deductor, the tax shall be deducted at 20%. This provision will be effective from July 1, 2022. 

The tax will be deducted at the time of payment by any mode, or at the time of credit of such sum to the account of the resident person, whichever is earlier.

With the introduction of Section 194S, the burden of compliance falls on the buyer of such VDAs. The tax is deductible if the value of the transactions exceeds the prescribed threshold.

TDS is required to be deducted from the gross amount of consideration paid to the resident person for the transfer of VDAs.

Also, in case of payment wholly in kind or in exchange for another VDA, where there is no part in cash, the person acquiring the VDA is liable to pay TDS. 

Exemptions from TDS under Section 194S

Is every assessee who buys such VDAs liable for deducting TDS? No, there are exceptions to the rule. A specified person shall be required to deduct TDS if the aggregate value of consideration to a resident is less than Rs 50,000 during a financial year. In any other case, this threshold limit is Rs 10,000 during the financial year.

Further, this specified person could be an individual or Hindu undivided family (HUF) having a turnover from business not exceeding Rs 1 crore or turnover from profession that is not more than Rs 50 lakh in a preceding year. It could also include an individual or HUF that does not have a business income at all. 

For a TDS deduction and deposit, a tax deduction account number (TAN) is mandatory. However, in the case of a specified person, TAN is not required under Section 203A of the ITA. Also, the provision to deduct TDS at a higher rate under Section 206AB in the case of non-filers of income returns is not applicable. 

Examples

Date of Sale/Exchange	Mode of payment	Consideration	PAN of payee	Payer is Specified Person	TDS Applicability
March 1, 2022	Cash	Rs 30,00,000	Yes	No	Not applicable
July 1, 2022	Cash	Rs 10,000	Yes	No	Not applicable
July 1, 2022	Cash	Rs 49,000	Yes	Yes	Not applicable
July 1, 2022	Cash	Rs 30,00,000	Yes	No	TDS at 1% applicable
July 1, 2022	Cash	Rs 30,00,000	No	No	TDS at 20% under Section 206AA
July 1, 2022	Property (Kind)	Rs 30,00,000	Yes	No	Deductor needs to ensure that the tax required to be deducted has been paid.

Overriding Effect of Provision

In cases where a transaction is subject to a TDS under Section 194-O (TDS to be deducted by an e-commerce operator) as well as Section 194S, tax shall be deducted under Section 194S.

Frequently Asked Questions (FAQs)

• Does a company fall under the category of a specified person?

No, a specified person category is applicable only in the case of an individual. A company will fall under the ‘other’ category and will have to deduct TDS if the consideration for the transfer of VDS is more than Rs 10,000.

• Will Goods and Services Tax (GST) be levied on VDAs?

Cryptocurrencies and NFTs will fall in the category of goods, so GST (CGST and SGST) will be payable at 18%.

Trading of cryptocurrencies and NFTs on exchanges are considered services, and hence, GST (CGST and SGST) will become payable at 18% on the commission generated.