What You Need to Know About TDS on Virtual Digital Assets?

Initial media announcements declared that the rate of TDS on Virtual Digital Assets (VDA) has decreased to 0.1 percent. However, in a late evening circular, the government debunked prior reports. They illustrated that the rate of TDS on Virtual Digital Assets will remain to be 1 percent. This will be applicable from July 1, 2022.

What is TDS?
Government Plans on TDS
What Does the Law on TDS on VDA, Crypto Say?
When Will TDS on VDA, and Crypto Be Applicable?
Who Is a ‘Specified Person’?
Who Has to Pay TDS?
Role of Third Party
What if the Payment Is Made in Kind or by Exchanging Two VDAs?

What is TDS?

Tax Deducted at Source or TDS is a method to acquire tax on revenue, asset deals, or dividends. According to the Income Tax Act, an individual making a payment has to pay TDS if the payment exceeds a certain limit. TDS is regulated by the Central Board of Direct Taxes (CDBT). This falls under the Department of Revenue.

Government Plans on TDS

CBDT on Wednesday stated that the TDS on virtual digital assets will continue to be 1 percent. This was clarified when some media reports stated that the TDS rate on VDAs has dropped to 0.1 percent.

"Some media reports have come to the notice of CBDT claiming that the rate of TDS on Virtual Digital Assets(VDA) has been reduced to 0.1%. It is hereby clarified that there is no change in the rate of TDS on VDA, which continues to be 1%," read the official clarification.

The government had regulated a 30 percent tax deduction on the gains of crypto assets. With guidance from organizations (the World Bank and IMF) and stakeholders, the centre will shortly conclude a conference paper on cryptocurrencies, Economic Affairs Secretary Ajay Seth said last month.

What Does the Law on TDS on VDA, Crypto Say?

On June 22, 2022, it was issued that TDS on Virtual Digital Assets and cryptocurrencies will continue to be 1 percent. As per section 194S of the Income-tax Act, any VDA buyer is obliged to deduct 1 percent of the amount paid to the seller (resident Indian).

Moreover, the tax rate will be higher in the absence of the PAN. Adhering to the non-availability of the PAN, the tax imposed on VDA (at the time of transfer) will be 20 percent. Besides, if a person has not filed their income tax return, the TDS will be deducted at a 5 percent rate.

When Will TDS on VDA, and Crypto Be Applicable?

As per CBDT reports, TDS on Virtual Digital Assets and Cryptocurrencies will be applicable if:

• The sum paid on a single or aggregate basis by the specified person (buyer) crosses 50,000 INR during the financial year; or
• The sum paid on a single or aggregate basis by anyone other than the specified person (any other buyer) crosses 10,000 INR during the financial year.

Who is a ‘Specified Person’?

• An individual or HUF (Hindu Undivided Family) who does not have any income under the head 'profit and gains from business and profession'
• An individual or HUF having income under the head 'profit and gains from business and profession' whose total sales/gross receipts/turnover from business does not exceed Rs 1 crore - or in case of the profession does not exceed Rs 50 lakh.

Wadhwa says, "An individual (not having income from business and profession) will be required to deduct tax at the time of buying VDA, crypto if the payment exceeds Rs 50,000. An individual (having income from the business profession) will be required to deduct TDS if the turnover of business or profession in the previous financial year exceeds Rs 1 crore or Rs 50 lakh respectively.”

“The tax will be deducted if the payment made at the time of buying VDA exceeds Rs 50,000. Any other person (for example Company) will deduct TDS at the time of buying VDA, crypto if the payment exceeds Rs 10,000."

NOTE: The tax has to be paid after deducting GST and other charges. Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India says, "It has been clarified that where tax is deducted under the VDA provisions no tax shall be required to be deducted considering the provisions regarding the purchase of goods (without getting into the aspect whether VDAs are goods or not). The tax is to be deducted only on the net amount excluding the charges and GST."

Who Has to Pay TDS?

After July 1, any individual who purchases a Virtual Digital Asset, such as a non-fungible token (NFT) - or any other cryptocurrency has to pay 1 percent TDS.

“The new section mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an amount equal to 1% of such sum as income-tax thereon,” read the circular by CBDT.

The law applies to non-resident Indians (NRIs) as well. If they purchase VDAs from an Indian, they are required to pay 1% TDS. However, if an NRI buys through another NRI, they need not pay the tax.

Role of Third Party

The role of a third party would be to deliver a declaration (in Form No. 26 QF) once every three months. They need to provide the declaration for all trades of the quarter on or before the expected date (according to the income-tax regulations).

The Exchange would also be needed to provide its income tax return. All of these transactions must be incorporated in such returns. If these requirements are catered to, the buyer will not be pressed against any charges under section 201 of the Act for these agreements.

What if the Payment is Made in Kind or by Exchanging Two VDAs?

If a person makes the payment in kind (by providing certain services), they still need to pay 1% TDS. Further, if they pay through an exchange of VDA, the tax will still be deducted. For instance, ‘X’ buys Ethereum from ‘Y’ in exchange for Bitcoin. Likewise, the tax will be deducted by both ‘X’ and ‘Y’. Both the parties need to pay their respective taxes.

Conclusion

Virtual Digital Assets have achieved enormous popularity in current times. Accordingly, the volumes of trading in cryptos and digital assets have elevated significantly. The Central Board of Direct Taxes (CBDT) handed out comprehensive guidelines on TDS for cryptocurrencies and Virtual Digital Assets. The tax rate continues to be 1 percent, applicable onwards July 1st, 2022.

FAQs

How TDS will be deducted on cryptocurrency?

1% TDS is applicable on payments toward cryptocurrencies beyond Rs 10,000 in a financial year.

Is TDS applicable to assets?

Yes, TDS is applicable to any earnings made by your fixed assets.