All You Need To Know About Taxation On Income Arising From Virtual Digital Assets

As we all recollect that the Finance Act 2022 was passed with some changes to the Finance Bill introduced on February 1, 2022, the Bill stated that a tax of 30 per cent would be charged on income arising from Virtual Digital Assets, w.e.f. April 1, 2022, and TDS at 1 per cent will become applicable w.e.f. July 1, 2022.

Pursuant to the above, the Central Board of Direct Taxes, Ministry of Finance, Department of Revenue, on June 22, 2022, came out with detailed guidelines for removing difficulties under Section 194S(6) of the Income Tax Act, 1961.

Chapter XVII of the Income Tax Act, 1961 deals with provisions relating to the collection and recovery of tax. A new Section (Section 194S) was introduced vide Finance Act, 2022, which provides for Payment on Transfer of Virtual Digital Assets. The said provision will become applicable for FY 2022-23 w.e.f. July 1, 2022.

The new section mandates a person responsible for paying any resident any sum by way of consideration for the transfer of a virtual digital asset (VDA) to deduct an amount equal to 1 per cent of such sum as income tax thereon. The tax deduction must be made at the time of credit of such sum to the resident's account or at the time of payment, whichever is earlier.

A Deep Dive!

Provided that in a case where the consideration for transfer of the virtual digital asset is:

(a) Wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or (b) Partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such transfer; the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax required to be deducted been paid in respect of such consideration for the transfer of virtual digital asset.

This deduction is not required to be made in the following cases:

(i) The consideration is payable by a specified person, and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or

(ii) The consideration is payable by any person other than a specified person, and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.

"Specified person" means a person, (a) being an individual or an undivided Hindu family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of the profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred; (b) being an individual or an undivided Hindu family, not having any income under the head "Profits and gains of business or profession".

If the PAN of the deductee (buyer) is unavailable, then the tax at the time of transfer of VDA will be deducted at 20 per cent. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5 per cent (as against the standard rate of 1 per cent) if the payer is not a specified person.

What Is New TDS Certificate In Form16E?

A new TDS certificate in Form16E has been introduced. The buyer who deducts tax at the time of making payment will be required to issue Form 16E to the seller of VDA within 15 days from the due date of furnishing the challan-cum-statement in Form26QE.

It is pertinent to note that these guidelines will apply to cases where the transfer of VDA is taking place on or through an Exchange and also other transactions like peer-to-peer and others, where the provisions of section 194S of the Act shall apply to the extent and in the manner as clarified by the CBDT.

Primarily the responsibility to deduct tax is of the buyer. Therefore in peer-to-peer transactions, the buyer is required to deduct tax. However, when the trades are being conducted through an exchange, the responsibility to deduct tax will vary depending on the parties involved (Buyer, Exchange or Broker) and the ownership of the VDA.

While TDS on loss-making transactions is refundable, the inability to offset crypto losses against gains still needs to be addressed.

The clarification issued by CBDT has come as a breather to the investors who are now in a position to invest and trade. This initiative by the government will go a long way in creating an ecosystem for virtual digital assets that will benefit all stakeholders.

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