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Direct Tax Alert - CBDT issues guidelines on Virtual Digital Asset’s tax withholding provisions

27 June 2022

Recently, there has been lot of development in the field of Virtual Digital Asset (VDA). With a view to bringing the VDA transaction within the tax net, the Finance Act, 2022 inserted Section 115BBH in the Income-tax Act, 1961 (IT Act). Further, it also inserted Section 194S(1)1  in the IT Act to provide for tax withholding of @1% from the consideration. Section 194S(3) of the IT Act exempts certain transactions from the purview of tax withholding subject to specified conditions. This section is effective from 1 July 2022. Various representations were made by different stakeholders. In this regard, in terms of section 194S(6) of the IT Act, recently, the Central Board of Direct Taxes (CBDT) has issued a circular2  to provide guidelines for tax withholding where the transfer of VDA is taking place through the exchanges. 

We, at BDO in India, have analyzed and summarized the aforesaid circular and provided our comments on its impact hereunder:
1. Applicability of the Guidelines

These guidelines will apply only in cases where the transfer of VDA is taking place on or through an Exchange3. In other cases (like peer to peer and others) provisions of section 194S of the Act shall apply and so far as these guidelines are concerned clarifications provided only in Question 6 shall apply.

2. Transfer of VDA taking place on or through an Exchange

Sr. No.

Type of transaction

The person responsible to withheld tax

1

VDA is owned by a person other than the Exchange

  1. Tax has to be withheld by the Exchange at the time of making payment to the seller.
  2. Where the broker4 owns the VDA, the amount paid by the Exchange to the broker will be subject to tax withholding.
  3. Where the transaction between the Exchange and the seller is through a broker, the responsibility to deduct tax is on both viz. the Exchange and the broker. However, the Exchange and the broker may enter into a written agreement that the broker may deduct the tax on such payment.

2

VDA is owned by the Exchange

  1. Tax has to be withheld by the buyer.
  2. Where the buyer is not aware that the VDA is owned by the Exchange or where the VDA is purchased by the buyer through a broker, the Exchange may enter into a written agreement with the buyer or his broker that with regards to such transactions the Exchange will deduct and pay the taxes before the due date.

 

 

3. Transfer of VDA for consideration in kind or exchange of another VDA

  • As per proviso to section 194S of the Act, where the consideration for transfer of VDA is either in kind or in exchange of another VDA or partly in kind and cash component is not sufficient to mee the TDS liability, the buyer (i.e. a person responsible of paying such consideration) will have to ensure that tax has been deducted before paying the consideration to the seller.
  • In a situation where one VDA ‘XYZ’ is exchanged for another VDA ‘PQR’, then the parties involved are both the buyer and seller. Therefore, in such a scenario, both the parties need to pay taxes and show the proof of payment of taxes and then exchange the VDA.
  • Where such transaction is through an Exchange, the Exchange may withhold taxes for such transaction after entering into a written agreement with the buyer/seller. If this option is exercised, the Exchange would be required to deduct and pay taxes on both the legs of the transaction and report such transactions in Form 26Q. Therefore, the buyer and seller would not be liable for a deduction of tax.
  • Form No. 26Q has been modified for reporting such transactions.
  • There would not be any further TDS for converting the tax withheld in kind in the form of VDA into INR or from one VDA to another VDA and then into INR.

4. Applicability of section 194Q5 of the IT Act to VDA

Once the tax has been withheld as per the provisions of Section 194S of the IT Act, the tax would not be deductible under Section 194Q of the IT Act.

5. Tax withholding to be on-net basis

Tax is required to be withheld on a net basis after excluding GST and charges levied by the deductor.

6. Liability where payment is carried out through payment gateways

The payment gateway will not be required to withhold tax if the buyer has withheld the taxes before paying the consideration. For this, the payment gateway should take an undertaking from the buyer regarding the tax withholding on such transactions.

7. Computation of threshold limit

  • As the threshold of INR 50,000 (or INR 10,000 as the case may be) should be considered for a fiscal year, the same shall be considered from 1 April 2022.
  • Hence, once the relevant threshold has been crossed during FY 2022-23 then tax will be required to be withheld on the consideration paid on or after 1 July 2022.
  • The provision of section 194S of the Act will not apply to consideration for transfer of VDA which has been credited or paid before 1 July 2022.

8. Compliance Requirement

Sr. No.

Form Number

Purpose

1

Form No. 26QE

Reporting of transfer of VDA for consideration in kind or in exchange of another VDA by the specified persons.

2

Form No. 26QF

Furnishing of Quarterly statement of VDA transaction executed on the Exchange

 

BDO Comments

With tax withholding on VDA effective from 1 July 2022, these guidelines will give much-needed clarifications on various open matters. However, the clarifications have raised further issues/challenges e.g., guidelines provide that no tax withholding will be required subject to necessary documents maintained, but which documents are not clarified. The record-keeping done by the Exchange may not be practical and could lead to further complications in complying with these provisions. These guidelines only cover transactions taking place through Exchange and hence one should await guidelines on peer-to-peer or other transactions which take place otherwise through Exchange.

 

1 As per section 194S of the IT Act, any person responsible for paying to any resident any sum by way of consideration for transfer of a VDA, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.

2 Circular No. 13 of 2022 dated 22 June 2022

3 Exchange means any person that operates an application or platform for transferring of VDAs, which matches buy and sell trades and executes the same on its application or platform.

4 Broker means any person that operates an application or platform for transferring of VDAs and holds brokerage account(s) with an Exchange for execution of trades.

5 Tax withholding @0.1% on purchase of goods