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Guidelines for TDS to be deducted on the transfer of Virtual Digital Assets as per the provisions of Section 194S

Source: Circular No. 13 of 2022

With the purpose of bringing Virtual Digital Asset (“VDA”) within the ambits of the taxation, Hon’ble Finance Minister introduced section 194S via The Finance Act 2022. To bring more clarity in provisions,
CBDT has issued certain guidelines which are as follows:

  1. TDS applicability when transaction is entered through Exchanges
  1. Where the owner of the VDA is person other than exchange

A. Where broker is the seller

Since multiple parties are involved in the transaction, CBDT has clarified that the role of the parties
involved shall be as follows:

  • Exchange, which is making payment to the seller, shall be the deductor of TDS
  • Seller (Broker), who is selling the VDA, shall be the deductee in TDS compliance
  • Buyer, who is purchasing the VDA, will have no role in TDS compliance

B. Where broker is not the seller and is only facilitating transaction

In this case, where broker is not the seller of VDA, the role of parties involved shall be as follows:

  • Exchange and/or Broker, which is facilitating the transaction, shall be the deductor of TDS.
    The onus to deduct TDS lies on both the exchange and the broker. However, if its mutually
    decided through written agreement between the exchange and broker, then the broker shall be
    liable to deduct TDS.
  • Seller, who is selling the VDA, shall be the deductee in TDS compliance
  • Buyer, who is purchasing the VDA, will have no role in TDS compliance

II. Where the owner of VDA is Exchange

  • In cases where the owner of VDA is the Exchange itself, then the liability to deduct TDS is casted upon the Buyer, i.e., the primary responsibility to deduct TDS lies on Buyer in such cases. However, in certain circumstances due to practical limitation, the buyer may not know whether the VDA transferred is actually owned by the Exchange or not, which creates genuine doubt regarding the liability to deduct TDS by the buyer. This is because if VDA is not owned by the Exchange, then such case will fall under Situation I explained above in which Buyer is outside the purview of TDS compliances.
  • Although, the primary responsibility lies with the buyer or his broker, however, in order to ease the compliance burden on the buyer, an agreement may be entered into between the buyer and exchange to cast the responsibility of paying the taxes on the exchange. In such cases, the exchange is required to furnish its return of income including all the transaction in it and the buyer/broker cannot be held as assessee in default under section 201 of the Act.

In both the Situations mentioned above, the Exchange is required to furnish quarterly
statement in Form 26QF.

2. TDS applicability when the transaction entered into is not in cash i.e., the transaction
is in kind or partly in cash and partly in kind

  • If the consideration paid in kind or partly in cash and partly in kind, then the person responsible for paying the consideration is required to ensure that the amount of TDS has been paid before paying such consideration. Payment shall be released only after the proof of payment has been obtained from the seller in the form of Challan.
  • In cases, where there is exchange of VDA between two parties, i.e., the consideration for VDA is another VDA, then both the parties are required to perform the aforementioned compliance and give each other tax challans evidencing payment.
  • Form 26Q is required to be furnished quarterly for reporting such transaction and in case of specified person (prescribed under section 194S of the Act) form 26QE is required to be furnished which has been introduced.
  • If the above transaction is carried out through an exchange, then tax may be deducted by the exchange, after entering into a written contractual agreement with the buyers/sellers. In such case the exchange is required to deduct TDS from the both legs of the transaction and pay to the government. In the Form 26Q the nature of transaction shall be reported by the exchange.

3. Mechanism for facilitating the TDS compliance in cases where TDS is deducted in
Kind.

  • Where one VDA is exchanged for another VDA and the parties to the transaction has authorized the Exchange to carry out the TDS compliance, then the exchange shall deduct 1% of the both the VDA’s exchanged and it shall maintain the trail of transaction evidencing the 1% deduction.
  • Thereafter, the exchange shall convert the tax deducted into primary VDA which shall be readily available for converting into cash. If the taxes are withheld in primary VDAs, this step would be ignored.
  • Afterwards, all the TDS deducted in the form of primary VDA shall be accumulated at the day end. The accumulated balance of primary VDAs at 00.00 hours will be converted into INR based on the market rate existing at that time.

4. Other Clarifications

  • It has been clarified by the govt that section 194S of the Act shall have the overriding effect on section 194Q of the Act.
  • TDS u/s 194S of the Act shall be deducted on net consideration, i.e., the consideration excluding of GST and commission paid for availing the services for transfer of VDA.
  • In case the transaction is facilitated through the payment gateway then payment gateway shall not be held responsible for deducting TDS. As a precautionary measure, the payment gateway can obtain an undertaking that TDS on the transaction has been deducted.
  • Threshold of Rs. 50,000 in case of specified person and Rs. 10,000 in case of other person shall be considered from 1.04.2022 and applicability for deducting TDS on such transaction shall arise from 01.07.2022.

Harmeet Singh, Tax Associate, SW India

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