Virtual Digital Assets (VDA) Taxation & TDS: Complete Guide to Sections 115BBH & 194S
Section 115BBH | Section 194S | Circular No. 13 of 2022
Crypto Currency
• Decentralized Digital Asset Exchange based on Blockchain technology
• Mining
• Cryptography
• More than 1500 virtual currencies like Bitcoin, Litecoin, Ripple, Matic, etc.
• Not legal tender in India
• In 2018, the RBI banned banking facilities to crypto exchanges
• In 2020, the Supreme Court ruled out the ban
• MCA mandates disclosure of gain and loss in virtual currencies
• MCA mandates disclosure of the value of cryptocurrency as on the date of the balance sheet
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Virtual Digital Asset [Section 2(47A)] Inserted by Finance Act 2022, means:
(Note: The Central Government may exclude any digital asset from this definition by issuing a notification.)
• Any Information, Code, Number, or Token
• Except: Indian or Foreign Currency
• Generated through cryptographic
• Providing Digital Representation of value
• Exchange with or without consideration or
• Functions as a store of value or unit of account
• use in any financial transaction or investment
• but not limited to investment schemes
• can be transferred, stored, or traded electronically
Non-Fungible Token
• or any other similar nature token
• means Digital Asset notified by CG
Digital Asset Notified by CG
Note: CG may exclude any digital asset from this definition by issuing a notification.
Tax on Income from Virtual Digital Asset [Section 115BBH]
Taxable @ 30%
No deduction will be allowed against income from Virtual Digital Asset except acquisition cost.
Nothing is clear in this section whether it is business income, capital gain, or income from other sources.
Loss arising from transfer cannot be adjusted against any other income, and loss cannot be carried forward to succeeding years.
Loss under any other source of income cannot be adjusted against income from Virtual Digital Asset.
o Honorable Minister of State for Finance, Mr. Pankaj Chaudhary, while replying to MPs, clarified that infrastructure cost incurred on mining will not be treated as a cost of acquisition.
o Loss of transfer from one VDA will not be allowed to set off against income arising from the transfer of another VDA.
TDS on Payment on Transfer of Virtual Digital Assets [Section 194S] (Effective from 1st July 2022)
Note (Clarification in circular 13 of 2022)
1. Since Section is applicable from 1st July 2022, but for the calculation of the threshold limit, Consideration shall be counted from 1st April 2022.
2. Since the TDS will be deducted at the time of credit or payment, whichever is earlier, such amount which has been credited or paid before 1st July 2022 would not be subjected to TDS under this section.
TDS where Section 194 is also applicable [Section 194S(4)]
Notwithstanding anything contained in section 194-O, in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted under sub-section (1)
As per Section 194O(3)
Notwithstanding anything contained in Part B of this Chapter, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of this Chapter:
Note: After analysis of both sections found that Section 194S prevails over Section 194O.
Question 1: Whether the provision of section 194Q is also applicable to
Answer: No
Question 2: Whether consideration shall be on a gross basis or a net basis
Answer: On a net basis, after excluding GST or charges levied by the deductor for rendering services.
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Analysis of Circular 13 of 2022
• Section 194S(6) authorizes CBDT to issue guidelines with the Approval of CG & • These guidelines are required to be laid before both houses of parliament &• Binding on Income Tax authorities and Transferor TDS in Case of Transfer via Exchange or Broker
Notes:
1. In case 1: Buyer pays consideration to exchange either directly or through a broker, and the exchange pays to the owner of VDA, then the responsibility to deduct TDS arises only on the exchange.2. In case 2: Buyer pays consideration to exchange either directly or through a broker, and the exchange pays to the broker, and the broker is the owner of VDA, then the responsibility to deduct TDS again arises on the exchange.3. In Case 2: another situation Buyer pay consideration to exchange either directly or through a broker and exchange pay to broker and broker pay to owner of VDA then responsibility to deduct TDS arises on both exchange and broker.If there is are written agreement between broker and exchange then broker alone deduct TDS and exchange furnish this transaction in quarterly statement (Form 26QF).4. In Case 3: if an exchange is the owner of VDA Primary responsibility: Buyer or his brokerIf there are written agreement between buyer or his broker and exchange – Exchange will pay tax and furnish this transaction in quarterly statement (26QF). TDS In Case of exchange or consideration in Kind
[Provision of Section 194S(1)]
Case: Consideration for transfer of VDA is
• Wholly in Kind
• In Exchange for another VDA
• Partly in cash or partly in Kind, but part of the cash is not sufficient to deduct TDS
In the above cases payer ensures that the required tax has been paid in respect of the transfer.
As per the Circular, in case of Kind
• Buyer will release the consideration in kind after the seller provides proof of payment of such tax (eg, Challan detail, etc.)
• In a situation, Mr. Akash transfers Bitcoin to Mr. Ajay and receives Ripple from Mr Ajay
In this case, both are the buyers, so both need to pay tax and provide evidence to the other.
Note: In the above cases Payer reports this transaction in form 26Q. And in case of the specified person same has been reported in From 26QE.
If the transaction is through an exchange then Exchange will deduct TDS on the basis of written agreement between buyer/seller and exchange.
Exchange will deduct TDS for both legs of transactions and pay to the Government, and report the same in 26Q.
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[Provision of Section 194S(1)]
Case: Consideration for transfer of VDA is
• Wholly in Kind
• In Exchange for another VDA
• Partly in cash or partly in Kind, but part of the cash is not sufficient to deduct TDS
In the above cases payer ensures that the required tax has been paid in respect of the transfer.
As per the Circular, in case of Kind
• Buyer will release the consideration in kind after the seller provides proof of payment of such tax (eg, Challan detail, etc.)
• In a situation, Mr. Akash transfers Bitcoin to Mr. Ajay and receives Ripple from Mr Ajay
In this case, both are the buyers, so both need to pay tax and provide evidence to the other.
Note: In the above cases Payer reports this transaction in form 26Q. And in case of the specified person same has been reported in From 26QE.
If the transaction is through an exchange then Exchange will deduct TDS on the basis of written agreement between buyer/seller and exchange.
Exchange will deduct TDS for both legs of transactions and pay to the Government, and report the same in 26Q.
Conclusion
With a 30% tax on VDA income and 1% TDS on transactions, compliance with Sections 115BBH and 194S is crucial for cryptocurrency traders, investors, and businesses.
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