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

First things first, virtual digital assets (VDAs) are 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). This will be taxed at a flat rate of 30% (plus cess and surcharges) under Section 115BBH 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 buyer of such VDAs bears the burden. 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) with a turnover from a business not exceeding Rs 1 crore or a turnover from a profession not more than Rs 50 lakh in a preceding year. It could also include an individual or HUF without a business income at all. 

Also, it is important to note that Section 194S is applicable only for the purchase of VDA from an Indian tax resident. Thus, the applicability of Section 194S is as follows : 

1. Trading in Indian Crypto Exchanges:  As per the notification from the income tax department, any trading in crypto exchanges (including P2P) is liable to deduct such TDS. Exchange is also liable to report such transactions to the income tax department in Form 26QF.
2. Trading in International Exchanges (Crypto to Crypto):

Section 194S is applicable only when crypto is bought from an Indian tax resident. Since these are exchanges located outside, one can take a stand that such entities are outside India, and no income is accrued in India. Thus no TDS is applicable either in Section 194S or in Section 195.

3. Trading in International Exchange (P2P):

When you buy crypto using INR at P2P in an international exchange, you are certain that the person from whom you are buying is an Indian resident holding an Indian bank account. However, these exchanges might not automatically deduct TDS. In such cases, the buyer needs to manually collect the PAN from each seller and file a TDS return on the same.

Process of TDS Deduction :

1. Specified Person: No TAN is required for TDS deduction u/s 194S. Such a person will have to log in to their Income tax portal >> E pay tax >> Select Form 26QE to file their TDS return.

2. Other than specified Person: Entity having TAN can use Form 26Q to report transactions on which TDS is deducted under section 194S
3. Crypto Exchanges: Such entities will have to file transactions in Form 26QF on a quarterly basis 

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

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.