Applicability

The Finance Act of 2022 added a new section 194S to the Income-tax Act of 1961, which says that anyone who is responsible for paying a resident person for the transfer of virtual digital assets must deduct tax (VDAs).

Limit under section 194S

According to Section 194S of the Income Tax Act, the person who pays for the purchase of virtual digital assets (such as cryptocurrencies, NFTs, etc.) must deduct TDS at the rate of 1% of the amount paid for cryptos. The rule goes into effect on July 1, 2022.

It is important to remember that there is no need to deduct TDS if the total value of the consideration payable on crypto transactions with a resident is less than Rs 10,000 in a financial year.

Section 194S, however, has a Rs. 50,000 limit for certain people before they can deduct tax. The people on the list could be:

• An individual or Hindu Undivided Family (HUF) whose business income in the previous year did not exceed Rs 1 crore.
• A person or Hindu Undivided Family (HUF) with professional earnings of less than Rs 50 lakh in the year before.
• A person or HUF that doesn’t make any money from a business.

 After Introduction of Section 194S

Who should deduct TDS under Section 194S?

1. Direct crypto transfer to the seller in cash

The plain meaning of the rules is that the transferor must deduct and deposit the TDS amount before releasing the consideration. So, the rules say that if there is a direct sale between a buyer and a seller, the buyer is responsible for deducting TDS.

1. For transactions through the crypto exchanges in cash

Compliance was hard to understand because buyers won’t have all of the seller’s information if the transaction is made through a crypto exchange. For the same reason, the guidelines make it clear who is responsible for deducting TDS at different stages (direct payments or through brokers).

III. For transactions where the consideration is in kind or in exchange for another VDA   

• If the transaction is not through an exchange,

If one VDA is being traded for another and both parties are the buyer and seller, they both need to pay tax on the transfer of VDA and show proof to the other party before exchanging the VDAs.

In situations where the transaction is partly in kind and there isn’t enough cash to cover the TDS liability, the person responsible for paying the transaction amount must make sure that the tax that needs to be deducted has been paid before releasing the consideration.

What changes for exchanges?

As you can see above, most of the work of making sure TDS deductions are done correctly falls on the Exchanges. On Form 26Q, the government needs to know how much tax was taken out. Also, if there is a written agreement between the Exchange and the broker/seller to shift the responsibility of tax deduction, the Exchanges are required to provide a quarterly statement in Form 26QF before the due date with all the details of these transactions and report them when they file their income tax return.

What changes for investors?

• Investors must take tax out of peer-to-peer transactions. When the consideration is in kind or there is a swap of VDAs, the tax must be paid to the government before the consideration can be given.
• Under Section 194S, people who deduct tax must give the person on whose behalf tax is deducted a TDS certificate in form 16E. After submitting the challan-cum-statement on Form 26QE, the certificate must be issued within 15 days.
• The seller’s Form 26AS will show all the TDS deduction details for every quarter. They can adjust the deductions against their total tax liability while filing the ITR.