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DIRECT TAX ALERT - CBDT issues guidelines for tax withholding VDA transactions executed otherwise through an Exchange; notifies taxable NFT as well as exempt VDA

07 July 2022


Finance Act, 2022 inserted section 194S in the Income-tax Act, 1961 (IT Act) to provide for tax withholding at the rate of 1 percent on Virtual Digital Asset (‘VDA’) transactions. In order to address concerns raised by various stakeholders, the Central Board of Direct Taxes (CBDT) has issued a Circular laying down the guidelines for section 194S of the IT Act applicable to transactions conducted on or through an Exchange. Please [Click here] to read our tax alert of this Circular. In the said Circular it stated that separate guidelines would be issued for all other types of transactions (i.e. transactions not conducted on or through Exchange). In this regard, recently, the CBDT has issued another Circular1 laying down guidelines for tax withholding on VDA transactions executed otherwise through an Exchange (i.e. peer to peer transaction).

Also, the CBDT has issued two notifications – one notifying exempt VDA2 and another notifying the Non-Fungible Token (NFT)3 that shall be regarded as VDA.

We, at BDO in India, have analyzed and summarized the aforesaid Circular and Notifications and provided our comments on its impact hereunder:

1. Tax withholding liability in respect of a peer-to-peer transaction (i.e. buyer to the seller without going through an Exchange)

Mode of consideration

Tax withholding requirement

Consideration is other than in kind

The buyer (person paying the consideration) of the VDA to comply with the tax withholding requirement

Consideration is in kind or in exchange for another VDA or partly in kind and cash is not sufficient to meet the TDS liability

  • Where consideration is in kind, the buyer to release consideration in kind only after the seller provides proof of payment of tax (e.g. challan details etc.).
  • Where VDA “A” is being exchanged with another VDA “B”, both the persons are a buyer as well as the seller. One is a buyer for “A” and seller for “B” and another is a buyer for “B” and seller for “A”. Thus, both need to pay tax with respect to the transfer of VDA and show the evidence to the other so that VDAs can then be exchanged. This would then be required to be reported in the TDS statement along with the challan number by both of them.


The tax so deducted is required to be deposited with Government in accordance with the time and procedure prescribed in the IT Act. TDS is required to be deducted on net consideration excluding GST.

2. Compliance Requirement

Sr. No.

Form Number



Form No. 26Q

Furnishing of Quarterly statements of VDA transactions executed on the peer-to-peer basis


Form No. 26QE

Furnishing of Quarterly statement of VDA transaction executed by the specified person4


3. Interplay between TDS on purchase of goods and TDS on VDA (i.e., Sec 194Q vs Sec 194S)

Without going into the merit of whether VDA is goods or not, the circular clarifies that once the tax is deducted under section 194S of the Income-tax Act, 1961 (IT Act), the tax would not be required to be withheld under section 194Q of the IT Act.

4. Items excluded from the VDA’s definition:

CBDT has issued a Notification2 to provide that the Central Government has notified the following VDA which shall be exempted from the purview of VDA’s definition:

  • Gift cards or vouchers for the purchase of or discount on goods or services,
  • Mileage points, reward points or loyalty cards given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program redeemable only for obtaining goods or services or discount on goods or services.
  • Subscription to websites or platforms or  applications.

5. Non-fungible Token (NFT) notified:

Further, the CBDT has issued another Notification3 wherein it has stated that the Central Government specifies a token which qualifies to be a VDA as NFT within the meaning of section 2(47A)(a) of the IT Act but shall not include a token whose transfer results in the transfer of ownership of the underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

BDO Comments

With the issuance of Circular and Notifications, the CBDT has clarified many questions raised by the taxpayers. While these will help the taxpayer in determining the tax withholding liability and accordingly be compliant, the Notification has created some more issues. For e.g., section 2(47A)(b) of the IT Act covers NFT. As per Explanation (a) to section 2(47A), NFT means such digital assets as the Central Government may specify. The term NFT is not appearing in clause (a) of section 2(47A) of the IT Act but in clause (b). Hence, it is to be seen how Notification No. 75 is interpreted.


1 Circular No. 14/2022 dated 28 June 2022

2 Notification No. 74/2022 dated 30 June 2022

3 Notification No. 75/2022 dated 30 June 2022

4 The following are defined as specified person for the purposes of this provision: (i) An individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession”; and (ii) An individual or HUF having income under the head “profits and gains of business or profession”, whose total sales/gross receipts/turnover from business carried on by him does not exceed one crore rupee or in case of profession exercised by him does not exceed fifty lakh rupee. This threshold is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.