TDS deduction will apply to all transfers of virtual digital assets including cryptocurrencies

Cryptocurrency sales transactions will attract an additional tax source deduction (TDS) of 1% from July 1, after the government introduced a 30% tax rate in the 2022-23 federal budget.

The TDS deduction will apply to all virtual digital asset (VDA) transfers, including cryptocurrencies and non-fungible tokens (NFTs) valued above Rs 10,000. In the newly introduced Section 47A of the Income Tax Act, VDA is defined as any information, code, number or token by or other means, excluding Indian or any other foreign currency. Non-fungible or any other similar tokens are included in this definition.

Finance Minister Nirmala Sitharaman announced a 1% TDS deduction in the 2022-23 federal budget. However, the rate of ambiguity emerged after the income tax department website mentioned that the tax rate for virtual digital assets had been reduced from 1% TDS for such assets to 0.1%. The IT department made it clear on June 22 that the TDS of virtual digital assets will remain at 1%, as announced in the Union Budget.

The Central Board of Direct Taxes (CBDT) clarified that the responsibility for withholding TDS rests with the person paying the seller – the buyer, the exchange or the broker. This means that TDS needs to be deducted from the selling price, and after deducting the TDS amount, the rest can be paid or transferred to the seller.

If a VDA transaction is conducted directly between a buyer and a seller, without the involvement or exchange of a broker, the buyer will be required to deduct tax under Section 194S of the IT Act.

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When transferring VDA through a broker or exchange, the tax relief will be made by the exchange, i.e. credited or paid to the seller. In the case of a broker who is not the seller, both the broker and the exchange are liable for tax deductions if there is no prior written agreement between the parties.

When the VDA being sold is primarily owned by the exchange, it can enter into a written agreement with the buyer or its broker that the exchange will pay taxes on all such transactions.

In exchange for VDA in kind, after the seller provides proof of paying the tax, the buyer needs to release the consideration in kind. For VDA for VDA transactions, both the buyer and the seller are required to pay taxes on the transfer of the VDA and present evidence to the other so that the VDA can then be exchanged. The transaction must then be reported in the TDS statement along with the challenge number by completing Form 26Q.

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