TDS: The onus is on buyers of virtual digital assets
Premium- From 1 July, buyers of VDAs will have to deduct tax at 1% of sale consideration
The Finance Act, 2022, inserted a new section, 194S, in the Income Tax (I-T) Act, 1961, with effect from 1 July. This section mandates the buyer of a virtual digital asset (VDA), to ensure that tax is deducted at source (TDS) at 1% of sale consideration. This simply means, that if Arun sells Ethereum to Anand, then Anand will be required to deduct tax from the consideration payable to Arun, the seller.
But in a practical situation, the transactions for VDA take place through an exchange, that is, a platform or application for transferring of VDAs. An exchange is only a mediator and not the buyer. Strictly speaking, the liability to deduct TDS is of the buyer and not of the exchange. But the amount is remitted from the buyer to the exchange and then from the exchange to the seller. Hence, in order to remove difficulties for transactions taking place through an exchange, the Central Board of Direct Taxes (CBDT), ministry of finance, GoI has issued circular number 13, dated 22 June and clarified certain situations for deduction of TDS.
Suppose, Sanjay sells Bitcoin to Kalpesh for ₹1 lakh via a platform Z. Suppose, the charges levied by platform Z for this transaction are ₹1,000. In this case, platform Z will be required to deduct TDS on the net consideration after excluding GST/charges/commission. Hence, the TDS deducted by Z will be ₹990 [1% of net consideration of ₹99,000].
There are some situations where the exchange owns the VDA. In this case, the seller is the exchange itself. However, the buyer may be unaware of the fact that the exchange is not operating as a mere platform but also owns the VDA and hence the buyer must deduct TDS from the consideration payable to the exchange. In this case, the exchange may enter into a written agreement with the buyer that in regard to all such transactions, the exchange will be paying the tax on or before the due date for that quarter.
Practically, there are numerous transactions which take place on an exchange where one VDA is exchanged for another. For example, Surana buys 2 lakh units of crypto currency D from Suchak for 1 lakh units of crypto currency C. The transaction takes place on exchange Z. In this case, Surana is buyer for D and seller for C and vice-versa for Suchak.
When the consideration is in kind, the person responsible for paying such consideration is required to ensure that the tax required to be deducted has been paid in respect of such consideration, before releasing the consideration. Thus, both parties need to pay tax with respect to transfer of VDA and show the evidence to the other so that VDAs can then be exchanged. But since the transaction is through Z, there may be practical difficulties in execution. Hence, tax may be deducted by Z based on written contractual agreement with the buyers/sellers.
However, since there is no transfer of rupees, how will Z deduct the tax? Hence, Z must deduct 1% from each of the crypto currency, that is, 2,000 units of D will be deducted and the net remittance to Surana shall be 1,98,000 units of D, and 1,000 units of C will be deducted and the net remittance to Suchak shall be 99,000 units of C. Z should then immediately convert these 2,000 units of D and 1,000 units of C into rupees and deposit the TDS to the Central Government. Now, when C and D are converted to rupees, again Z becomes the seller.
However, since this conversion is for the purpose of depositing the TDS to the Government, this sale by Z will not be subject to TDS.
It is pertinent to note that in all the above cases, the exchange shall maintain the requisite records in this regard and make filings in the prescribed forms.
Nitesh Buddhadev is founder of Nimit Consultancy.