The income-tax (I-T) department has said that the 1% TDS on transfer of virtual digital assets would be levied on net transaction value and the onus of deducting the tax would primarily be on the exchanges.
The central board of direct taxes (CBDT) issued an FAQ (frequently asked questions) on the TDS (tax deducted at source) provisions on virtual digital assets (VDA) or cypto-currencies (crypto), which was introduced in 2022-23 Budget and will be effective from 1st July.
The FAQ said in a peer-to-peer (direct buyer to seller) transaction, the buyer paying the consideration will be required to deduct the TDS (tax deducted at source).
However, in case the transaction is taking place through an exchange, the onus of deducting TDS will be on the exchange which is crediting or making payment to the seller.
In case the credit/payment between exchange and the seller is through a broker (and the broker is not seller), there has to be a written agreement that the broker would be deducting the tax.
"The Exchange would be required to furnish a quarterly statement (in Form 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962," CBDT said.
The FAQ further said for transfer of VDAs owned by the exchanges, the buyer or his/her broker would be required to deduct the tax.
As an alternative, the exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions, the exchange would be paying the tax on or before the due date for that quarter.
With regard to transactions in kind or in exchange of another VDA, the FAQ said the exchange will enter into a written contractual agreement with the buyers/sellers for deducting tax.
"In these situations, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration," it added.
On whether the consideration for transfer of VDA shall be on gross basis after including GST/commission or on 'net basis' after exclusion of these items, it clarified that the TDS will be on the 'net' consideration after excluding GST/charges levied by the deductor for rendering service.
This means that the responsibility to deduct TDS has been put on the exchanges which will increase the regulatory and compliance burden for them. The exchanges have to further disclose these transactions in their tax return and maintain a proper trail. However, this would be helpful to the buyers and sellers both since they can enter into contracts with the exchange for passing the responsibility to deduct tax on their behalf in VDA to VDA transfers or otherwise as well.
The 2022-23 Budget has brought in clarity with regard to levy of I-T on crypto assets. From 1st April, a 30% I-T, plus cess and surcharges, is levied on such transactions in the same manner as it treats winnings from horse races or other speculative transactions.
A 1% TDS on payments over Rs10,000 towards virtual currencies has also been introduced which will kick in from July 1.
The threshold limit for TDS would be Rs50,000 a year for specified persons which include individuals/HUFs who are required to get their accounts audited under the I-T Act.