The Central Board of Direct Taxes (CBDT), vide Circular No. 13 of 2022 (titled ‘Guidelines for removal of difficulties under sub-section (6) of section 194S of the Income Tax Act, 1961’) has issued Guidelines (including FAQs) for Tax Deduction at Source (TDS) of Virtual Digital Assets (VDAs) on June 22, 2022. The Ministry of Finance, under the Finance Bill, 2022, had inserted a new provision for deduction of tax on the transfer of VDAs under Section 194S of the Income Tax Act, 1961, which was due to come into effect from July 1, 2022.
Section 194S(1) of the Income Tax Act mandates any person, who is liable to pay an amount as consideration to any resident for the transfer of VDA, to deduct a one percent income tax on the credited sum.
The CBDT vide the aforementioned Circular has attempted to eradicate ambiguity around the parties (involved in a VDA transaction) who would be responsible for deducting the one percent income tax.
The guidelines navigate the deduction of tax in different scenarios including transfer of VDA through brokers, peer-to-peer or through a VDA Exchange. In the case of peer-to-peer transfer of VDA, the guidelines have placed an onus on the buyer to deduct the prescribed tax before the payment of consideration. However, in the event such transfers are taking place on VDA Exchanges, the responsibility for deduction of tax on the transfer of VDA has been placed on the Exchange. The CBDT by providing such guidelines has aimed to make the Exchange the middleman between the buyer and the seller for achieving unencumbered transactions and tax deductions in line with the Income Tax Act.
Further, the guidelines have attempted to address all other uncertainties that may arise on Exchanges where multiple parties are involved. By way of an example, the guidelines have provided that in the event transfer of VDA is taking place between the buyer and the seller through a broker on the Exchange, there may be uncertainty as to whether the Exchange would be required to deduct tax or the broker. In such an event, the guidelines mandate the broker and Exchange to enter into a written agreement wherein the liability could be placed on the Exchange to pay the relevant tax under section 194S.
Similarly, the CBDT has extended its guidelines to operations wherein the consideration is in the form of kind or exchange of VDAs between the buyer and the seller. In such scenarios, the CBDT has provided elaborate guidelines to be followed by Exchanges for deduction of tax which includes proof of payment of tax prior to the release of VDA from buyer to the seller (if consideration is being paid in kind); execution of market orders by Exchanges to convert exchanged VDAs to primary VDAs (BTC, ETH, etc.); to further convert the primary VDAs to INR; and the requirement of a ‘contract note’ to the customer highlighting the tax withheld in VDA and its INR counterpart.
Other guidelines issued by the CBDT include the computation of consideration in line with the applicable thresholds for the Financial Year 2022-23. It also provides that in the event consideration is paid on an Exchange through payment gateways, the onus for deducting the prescribed tax would lay on the Exchange and not the payment gateway.
To conclude, it is opined that the aforementioned guidelines have attempted to canopy the scenarios that may arise in the transfers of VDAs for the purpose of tax deduction. These guidelines have provided elaborate clarifications for the operation of section 194S of the Income-tax Act, thereby eradicating ambiguity and uncertainty around the manner, time frames and threshold for tax deductions. The guidelines have gotten the wheels rolling for VDA Exchanges to implement mechanisms for deducting taxes and complying with other requirements as provided by CBDT under the said guidelines.