Virtual digital assets: established standards for tax deduction burden

In issuing detailed guidelines on the TDS rule for virtual digital assets (VDAs) such as cryptocurrencies, the Central Board of Direct Taxes (CBDT) laid out the different scenarios on Wednesday on how the tax will be applicable and on whom. it will be incumbent to deduct it. lie.

With the introduction of Section 194S into the Income Tax Act through the Appropriation Act 2022, a withholding tax (TDS) of 1% will be levied on the transfer of VDA to from July 1 if the value of transactions exceeds Rs 10,000 within a year.

The CBDT has, in the guidelines, defined tax deduction responsibilities in various cases. For example, if the VDA transfer takes place on or through an exchange and the transferred VDA does not belong to the exchange, the tax may be deducted by the exchange making the payment to the seller. However, if the payment between the seller and the exchange is made through a broker, the responsibility to deduct the tax lies with both the exchange and the broker.

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Similarly, in the event that the transfer of VDA takes place on or through an exchange, and the transferred VDA is owned by that exchange, the primary responsibility for deducting tax rests with the buyer or its broker. Alternatively, the exchange may enter into a written agreement with the buyer or its broker that, in respect of all such transactions, the exchange will pay the tax on or before the due date for that quarter.

This primarily addresses situations where the transfer of a VDA is done for money. The CBDT has also established examples of when VDA transfer occurs in exchange for another VDA.

For example, if two different cryptocurrencies, say bitcoin and ether, are traded, both people would be considered buyers as well as sellers. Therefore, both will have to pay tax on the transfer of the cryptocurrency. The guidelines also allow exchanges facilitating such transactions to deduct tax in these cases.

Additionally, the CBDT has defined four main VDAs – bitcoin, ether, USD Tether, and USD Coin – for the purposes of the lesser-known cryptocurrency tax deduction. “For example, when exchanging Monero to Deso…exchanges must immediately execute a market order to convert this in-kind tax deducted (1% Monero/1% Deso in the example above) into l one of the primary VDAs (BT, ETH, USDT, USDC) that can be easily converted to INR This step will ensure that tax deducted under Section 194S of the Act in the form of non-primary VDAs like Deso/Monero is converted into an equivalent of primary VDAs that have an INR market ready,” he said.

Commenting on the guidelines, AKM Global’s tax partner, Amit Maheshwari, said: “Overall, the responsibility for deducting TDS has been put on exchanges, which will increase the regulatory and compliance burden for them…Exchanges must disclose more of these transactions on their tax return. and maintain a proper trail. However, it would be useful for buyers and sellers as they can enter into contracts with the exchange to pass on the responsibility to deduct tax on their behalf in VDA to VDA transfers or otherwise as well.

Neeraj Agarwala, Partner, Nangia Andersen LLP, said: “Overall, the CBDT succeeded in clarifying several open issues that were being debated in the professional circle. However, several of the recommendations made by the CBDT, particularly with regard to the documents that should be kept between the parties to the transaction, for example the agreement, challans, undertakings, etc. may not be practical and may therefore result in multiple clarifications being issued under this redundant circular.