19 July 2022
by Stella Joseph and Yash Desai
Economic Laws Practice
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Vide Indian Union Budget of 2022 a new tax regime hasbeen introduced for taxing Virtual Digital Assets ("VDA")in India with effect 1st April 2022. A concomitantprovision under Section 194S of the Income-tax Act, 1961 ("theAct') as regards Tax Deduction at Source ("TDS") hasnow become effective from 1st July 2022. Since theintroduction of this new tax regime, the Indian crypto market haswitnessed a sharp decline, which is also attributable to the globaltrends in relation to crypto trade. From the perspective of the newtax regime in India, the biggest concern is the high rate of tax of30%. Further, an equally concerning aspect has been the modalitiesin which the TDS provisions would be effectuated.
TDS provisions as introduced in Feb of 2022 (though madeeffective from 1st July, 2022) cast an obligationdirectly cast obligation on the buyer of VDA to deduct tax at therate of 1% at the time of credit of such sum to the account of theresident or at the time of payment, whichever is earlier. However,at that stage it was unclear whether crypto exchanges would playany rule in facilitating such TDS, especially in cases where theydo not own the VDA itself but merely facilitated the trade of suchVDA.
Now, at the cusp of the TDS provisions becoming effective from1st July 2022, the CBDT has issued certain importantguidelines in the form of Circular No. 13 of 2022 dated 22.06.2022for transactions conducted on or through an Exchange("Guidelines"), as well as Circular No.14 of 2022 ("Circular") for othertransactions. The Guidelines specifically clarify as regards theobligations and roles that the Exchange can play as regardsdischarging the TDS, while recognizing the practical difficultiesfor crypto buyer to determine whether the VDA being transferred isbeing owned by a seller resident in India or otherwise, or by theexchange and thus determine, his/her liability do deduct TDS. Inthe parallel, the Government has also vide Notificationsdated 21st June, 2022 and 30th June, 2022,amended the existing Form 26Qs and introduced new Forms 16E, 26QEand 26QF in relation to the underlying reporting requirementsconnected with the TDS.
The below table summarises the key aspects which have beenclarified thereto:
Sl. | Particulars | Clarification issued by CBDT |
I. | Where VDA is transferred in Cash | |
1. | Where Exchange does not own the VDA | |
a. | Where no broker involved | Tax may be deducted only by the Exchange which is crediting ormaking payment to the seller (owner of the VDA beingtransferred). |
b. | Where broker is the Seller (owner of VDA) | The language of the Circular suggests that in this type oftransaction, there would be a TDS liability at both legs: (i) When exchange pays tothe broker, and (ii) When broker pays to the seller. |
c. | Where broker is not the Seller | § The responsibility to deduct tax shall be on both theExchange and the broker. § However, if there is a written agreement between theExchange and the broker, that broker shall be deducting tax on suchcredit/payment, then broker alone may deduct the tax . § The Exchange would be required to furnish a quarterlystatement (in Form no 26QF) for all such transactions on aquarterly basis |
2 | Where Exchange owns the VDA | |
a. | In all cases | § While the primary responsibility to deduct tax underSection 194S of the Act, in this case, remains with the buyer orhis broker, as an alternative the Exchange may enter into a writtenagreement with the buyer or his broker that, in regard to all suchtransactions, the Exchange would be paying the tax on or before thedue date for that quarter. § The Exchange would be required to furnish a quarterlystatement (in Form No. 26QF) for all such transactions. § The Exchange would also be required to furnish its incometax return and all these transactions must be included in suchreturn. |
II | Where VDA is transferred in exchange for anotherVDA | |
1. | In all cases | § It is clarified that in such cases of exchange of VDA,ordinarily, both, the seller and buyer would need to pay tax withrespect to transfer of VDA and show the evidence to other so thatVDAs can then be exchanged. § However, as an alternate mechanism, the Exchange candeduct TDS on both legs of the transaction and pay to Governmentand report about both the TDS deducted on both legs in the Form26QF. § If the Exchange deducts taxes for both legs oftransaction, the buyer and seller will not be independentlyrequired to ensure that the TDS required to be deducted has beenpaid before releasing such consideration |
Other aspects:
Through the said Guidelines and Circular, the Government hasalso clarified as regards the below aspects.
- No TDS under Section 194Q: Once tax isdeducted under Section 194S, tax would not be required to bededucted under Section 194Q of the Income-tax Act, 1961 (whichdeals with TDS applicable on sale of goods)
- TDS on net amount: TDS shall be applicable onthe net consideration after excluding GST or charges levied by thedeductor for rendering services.
- Liability of Payment Gateways: Paymentgateways will not be required to deduct tax under Section 194S onthe transaction, if tax has already been deducted. To facilitateproper implementation, the payment gateway may take an undertakingfrom the deductor regarding deduction of tax.
- Applicability of Limits: Calculation ofconsideration for determining whether the specified thresholds (ofINR 50,000 for specified persons or INR 10,000 otherwise) shall becounted from 1st April, 2022. Hence, if the value oraggregate value of the consideration for transfer of VDA payable bya person exceeds fifty thousand rupees (or ten thousand rupees)during the financial year 2022-23 (including the period up to 30thJune 2022), the provision of Section 194S of the Act shall apply onany sum, representing consideration for transfer of VDA, creditedor paid on or after 1st July 2022. Thus, any sum which has beencredited or paid before 1st July 2022 would not be subjected to taxdeduction under Section 194S of the Act.
Some Noteworthy Aspects:
- The Guidelines have been issued under sub-section (6) ofSection 194S for removal of difficulties, which are binding on theIncome-tax authorities and the person responsible for paying theconsideration for transfer of VDA. It is therefore, strictlyspeaking, not obligatory for the Exchanges to opt into thealternative mechanisms of becoming responsible for TDS, as laiddown in the Guidelines. However, practically, it may very wellbecome an economic necessity for the Exchange to take on the burdenof TDS to facilitate trade on its platform or application.
- It will be critical for Exchanges to enter into appropriatelyworded written agreements with the buyers, sellers and brokers (asapplicable), clearly stipulating who will be obligated to deducttax at source in the entire chain of transaction. Practically, itwould also be important to include suitable indemnity clauseswithin such agreements.
- The Exchanges would also be required to compile all relevantdata for reporting purposes. This will result in increase inadministrative costs for the Exchanges.
- The Guidelines do not specifically clarify as regards itsapplicability to Exchanges located outside India. In the absence ofany prescription one way or the other or any exclusion/ carve outfor non-resident exchanges, a strict reading would suggest that theGuidelines will even apply in relation to exchanges located outsidein India. For this purpose, they will have to obtain necessaryPermanent Account Number (PAN)/ Tax Identification Number (TIN) inIndia.
- In the scenario of an exchange of VDA, the Guidelinesspecifically mandate both the "buyer" and"seller" to deduct TDS, but as an alternative mechanism,provides for an option for the Exchange to deduct 1% TDS for bothlegs of the transaction. The Guidelines however do not clarify asregards instances of exchange of VDA, where one of the parties islocated outside India. Since the counter party is located outsideIndia, ideally the exchange should deduct tax only in relation theparty located resident in India. However, the Guidelines do notspecifically clarify on this aspect.
- The Exchanges while taking the onus of discharging TDS, willalso have to ascertain whether the consideration is paid by personsbelow the specified threshold (INR 10,000 generally and INR 50,000for specified persons, which include individuals/Hindu UndividedFamilies [HUFs] who are required to get their accounts auditedunder the Act). This threshold is to be seen in the financial yearimmediately in the financial year in which the VDA is transferred.Practically, Exchanges would have to obtain necessary declarations/certifications from the buyers as regards crossing of the saidthresholds.
Conclusion
While the Guidelines provide alternatives for Exchanges tofacilitate trade on its application or platform, it will result insubstantial administrative cost for them, should they choose tobear the TDS obligation. There would also be requirement for theExchanges to amend underlying contracts and terms and conditions,while incorporating suitable clauses. One will have to wait andexamine the overall impact of the new tax regime, and specificallythe TDS mechanisms, on the 'crypto winter' in thecountry.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
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As an expert in tax laws and regulations, particularly in the context of the Indian Union Budget of 2022 and its impact on the taxation of Virtual Digital Assets (VDA), I will delve into the key concepts presented in the article dated 19 July 2022 by Stella Joseph and Yash Desai from Economic Laws Practice.
The central theme of the article revolves around the introduction of a new tax regime for taxing Virtual Digital Assets in India, effective from 1st April 2022. One of the major concerns highlighted is the significant tax rate of 30%, which has led to a notable decline in the Indian crypto market, influenced not only by local factors but also by global trends in crypto trade.
The article brings attention to Section 194S of the Income-tax Act, 1961, which deals with Tax Deduction at Source (TDS) and became effective from 1st July 2022. The TDS provisions place an obligation on the buyer of VDA to deduct tax at the rate of 1% at the time of credit or payment, whichever is earlier. The ambiguity arises when considering the role of crypto exchanges in facilitating TDS, especially when they do not own the VDA but facilitate its trade.
The key development mentioned is the issuance of Circular No. 13 of 2022 and Circular No.14 of 2022 by the Central Board of Direct Taxes (CBDT) on 22nd June 2022. These guidelines provide clarification on the obligations and roles of exchanges in discharging TDS for transactions conducted on or through an Exchange.
Here are the summarized key aspects clarified by the CBDT:
-
Tax Deduction for Cash Transactions:
-
Where Exchange does not own the VDA:
- Exchange is responsible for TDS if no broker is involved.
- If the broker is the seller, TDS liability exists at both the exchange-to-broker and broker-to-seller stages.
- If there is a written agreement between the exchange and the broker, the broker alone may deduct tax.
-
Where Exchange owns the VDA:
- The primary responsibility remains with the buyer or his broker, but an alternative is an agreement for the exchange to pay the tax on behalf of the buyer.
-
-
VDA Transferred in Exchange for Another VDA:
- Both the seller and buyer are ordinarily required to pay tax.
- Alternatively, the Exchange can deduct TDS on both legs of the transaction and report it in Form 26QF.
-
Other Aspects and Clarifications:
- No TDS under Section 194Q once tax is deducted under Section 194S.
- TDS applicable on the net consideration after excluding GST or charges.
- Payment gateways are not required to deduct tax if it has already been deducted.
- Applicability of specified thresholds for consideration calculation.
-
Some Noteworthy Aspects and Conclusion:
- Guidelines issued under sub-section (6) of Section 194S for removal of difficulties.
- Exchanges may find it economically necessary to bear the TDS obligation.
- Importance of written agreements with buyers, sellers, and brokers with suitable indemnity clauses.
- Administrative costs for exchanges will increase due to data compilation for reporting purposes.
In conclusion, the article suggests that while the guidelines provide alternatives for exchanges to facilitate trade, the substantial administrative costs and the overall impact of the new tax regime, specifically the TDS mechanisms, on the 'crypto winter' in India remain to be seen.
