Guidelines for TDS on Virtual Digital Assets (VDAs)

Central Board of Direct Taxes (CBDT) issued detailed guidelines for removing difficulties for deduction of tax (TDS) on virtual digital assets (VDAs) as per the provision of section 194S of the Income-tax Act, 1961 (‘Act’) which will come into effect from 01.07.2022. In the guidelines, the Tax Department has defined the responsibilities of deducting the tax in various scenarios. Guideline on TDS/TCS under Section 194O, section 194Q & Section 206C

Synopsis of CBDT Notification

Central Board of Direct Taxes (CBDT) has amended income tax rules to specify ways to comply with the new tax deducted at source (TDS) provision on virtual digital assets (VDAs). The income tax department has come out with detailed disclosure requirements for TDS deductions for virtual digital assets, under which the date of transfer and mode of payment will have to be specified.

CBDT has specified the timelines to be adhered to by parties to a virtual digital asset transaction in reporting it to the tax authority
CBDT has also brought out the reporting format for the same.
Tax Department has defined the responsibilities of deducting the tax in various scenarios.

Section 194S in the Income Tax Act

The Finance Act, of 2022 introduced Section 194S in The Income Tax Act, 1961, under which a TDS of 1 percent will be levied on the transfer of virtual digital assets if the value of transactions exceeds Rs 10,000 in a year. The new section (Section 194S) mandates a person, who is responsible for paying to any resident any sum by way of consideration for the transfer of a virtual digital asset (VDA), to deduct an amount equal to 1 percent of such sum as income tax thereon. The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier

Eligible Person to Deduct the Tax on VDAs

CBDT clarified that if the buyer has deducted tax under Section 194S of the Income Tax Act, the seller will not be required to deduct it on the same transaction. To facilitate the proper implementation, the seller may take an undertaking from the buyer regarding the deduction of tax.

Filing of form 26QE

As per the new rules, any sum deducted under section 194S is to be paid to the central government within 30 days from the end of the month in which the deduction is made. Deposit of tax so deducted shall be made in the challan-cum-statement Form 26QE.

Issue of TDS certificate

The person responsible for the deduction of tax should give a TDS certificate to the payee within 15 days from the due date for reporting it to the government, according to the new rules.

Cases where Deduction is not required

This deduction (TDS) on virtual digital assets (VDAs) is not required to be made in the following cases:-

The consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed Rs 50,000 during the financial year
The consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed Rs 10,000 during the financial year

Computation of Rs 50,000 or Rs 10,000 Limit

The liability to deduct tax under Section 194S of the Act applies only when the value or aggregate value of the consideration for transfer of VDA exceeds Rs 50,000 during the financial year in case of consideration being paid by the specified person and Rs 10,000 in other cases

Eligible Person to Deduct the Tax In Case of Transactions through Exchanges

In cases where the transfer of VDA takes place on or through an exchange, and the VDA being transferred is not owned by the exchange, tax may be deducted by the exchange making the payment to the seller.

When the payment between the seller and the exchange is being done through a broker, the responsibility to deduct tax shall be on both the exchange and the broker.
In cases where the transfer of VDA takes place on or through an exchange, and the VDA being transferred is owned by this exchange, the primary responsibility to deduct tax remains with the buyer or his broker.
However, as an alternative, the exchange may enter into a written agreement with the buyer or his broker that regarding all such transactions the exchange would be paying the tax on or before the due date for that quarter.
This mainly deals with situations where the transfer of a VDA is being made against money. The tax department has also given examples of cases where the transfer of a VDA happens in exchange for another VDA.

Eligible Person to Deduct the Tax In Case of Kind

TDS be levied if the transfer of VDA is in kind, through an exchange or broker Where VDA is transferred for consideration in kind or partly in cash and partly in kind, through an exchange, tax may be deducted by the exchange. This alternative approach can be exercised based on a written agreement between the exchange and the buyers/ sellers. The exchange would be required to deduct tax on both legs of the transaction (buyers/ sellers) and report it as such. The CBDT clarification regard the TDS on virtual digital assets (VDAs) is summarized here:

Sl.No	Seller	Buyer	Is Broker Involved in selling	Is the transaction in cash or kind?	Who will deduct tax?
1	Any Person	Any Person	No	In cash	Exchange
2	Broker	Any Person	–	In cash	Exchange
3	Any Person	Any Person	Yes	In cash	Exchange and Broker
4	Exchange	Any Person	No	In cash	Buyer
5	Any 6Person	Any Person	No	In-kind	(a) Buyer and Seller; or (b) Exchange
6	Broker	Any Person	–	In-kind	(a) Broker and Seller; or (b) Exchange
7	Any Person	Any Person	Yes	In-kind	(a) Buyer and Seller; or (b) Exchange and Broker
8	Exchange	Any Person	No	In-kind	Exchange and Buyer