Guidelines on TDS under Section 194S of the ITA simplified

The Finance Act, 2022, introduced Section 194S in the Income-tax Act, 1961 (ITA), which became effective on July 1, 2022. 

If you trade in virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), a provision has been introduced for a deduction of 1% TDS on payments made on the transfer of VDAs. This is applicable in case the value of the transaction is more than Rs 10,000 or Rs 50,000 in the case of specified persons, in a particular year. The tax deducted is required to be reported to the government in Form 26Q in case of other persons and Form 26QE in case of specified persons.

If you buy cryptocurrency worth Rs 1,00,000, you must deduct TDS @1% of Rs 1,00,000 from your payment and pay the balance of Rs 99,000 to the seller. You will need to deposit Rs 1,000 with the government.

Who is a Specified Person?

TDS liability under Section 194S is applicable when the payment for the transfer of VDA exceeds Rs 50,000 during the financial year in the case of a specified person and Rs 10,000 in other cases.

Here, a Specified Person means:

• Individual or HUF who does not have income under business and profession
• Individual or HUF having business income up to Rs 1 crore
• Individual or HUF having professional receipts up to Rs 50 lakh

Further, the Central Board of Direct Taxes (CBDT) has recently issued clarificatory guidelines for TDS deduction on VDAs.

Prominent points of the guidelines for application of Section 194S

• Transfer of a VDA (in cash) through an Exchange (who does not own the VDA) 
• If the transfer of VDA takes place on or through an Exchange (who does not own the VDA) then the transaction chain may look something like this:

Buyer⇒ Broker ⇒ Exchange ⇒ Broker⇒Seller (owner)

Here, a buyer would credit the payment to the exchange (directly or through a broker). The exchange will then be required to credit the payment to the owner of the VDA (directly or through a broker).

In this case, there are many parties involved, but the exchange making the payment to the seller shall deduct TDS. However, if the payment between the seller and the exchange is made through a broker, then both the parties are responsible to deduct tax.

Alternatively, the exchange and broker may agree that the broker will deduct TDS on all such transactions. The exchange is required to furnish a quarterly report in Form No. 26QF on or before the due date.

Transfer of a VDA (in cash) through an Exchange (who does not own the VDA)

If the transfer of VDA takes place on or through an exchange (who does not own the VDA), then many parties are involved, and the buyer or his broker is required to deduct TDS.

Alternatively, the exchange may enter into an agreement with the buyer or their broker stating that the exchange shall pay the due tax on or before the due date of that quarter. In this case, the exchange would be required to furnish a quarterly report in Form No. 26QF on or before the due date. 

Transfer of a VDA (in kind) through an Exchange or broker or in barter for another one

Unlike the above cases, the payments could be in kind, partly in kind, or in barter for another one. In such cases, the exchange may deduct tax on both legs of the transactions based on its agreement. If the transaction is not done through an Exchange, the person making the payment must deduct and deposit the TDS.  

If TDS is deducted by the exchange is also in kind

a. The exchange shall maintain records for every VDA to VDA trade.

b. The exchange shall convert this tax withheld in kind to one of the primary VDAs [Bitcoin (BT), Ethereum (ETH), USD Tether (USDT), and USD Coin (USDC), etc.], which can be easily converted into Indian Rupees (INR).

c. The tax withheld, which is now converted into primary VDA, must be accumulated for the day from 00:00 hours to 23:59 hours.

d. The accumulated balance of primary VDAs with Exchange at 00:00 hours is to be converted into INR at the market rate by placing a sell order. 

e. The Exchange needs to issue a contract note over email to the customer, which shall include the TDS on VDA withheld in kind and its  INR value upon conversion. 

f. The Exchange is required to deposit the INR value in the government account within the due dates

For the assessment year (AY) 2022-23, Form No. 26Q has included provisions for reporting such transactions. Similarly, Form No. 26QE has been introduced in the case of specified persons.

The interplay of TDS under Section 194S and Section 194O

If the tax is deducted under Section 194S of the ITA, TDS under Section 194O (applicable to payments by e-commerce operator to e-commerce participant) would not be required.

The tax will be deducted from the net consideration after excluding Goods and Services Tax (GST) or other charges.  

Payment gateways and TDS under Section 194S

If the payment for the transfer of a VDA is made through a payment gateway, then the payment gateways are exempted from deducting TDS.