After the 30 per cent tax rate introduced by the Government in the Union Budget 2022-23, cryptocurrency sale transactions are set to attract additional tax deducted at source (TDS) of 1 per cent from July 1 onwards.
The TDS deduction will be applicable to all virtual digital asset (VDA) transfers including cryptocurrencies, and non-fungible tokens (NFTs) – worth over Rs 10,000. In the newly introduced clause 47 A of the Income Tax Act, VDA is defined as any information, code, number or token, except Indian or any other foreign currency, that is generated through cryptographic or other means. Non- Fungible or any other similar tokens are included in this definition.
A TDS deduction of 1 per cent was announced by Finance Minister Nirmala Sitharaman in the Union Budget 2022-23. However, ambiguity over the rates arose after the income tax department website mentioned that the rate for virtual digital assets had been brought down to 0.1 per cent from the 1 per cent TDS on such assets. Clearing the air, the IT department on June 22, reiterated that TDS on virtual digital assets will remain at 1 per cent, as announced in the Union Budget.
The Central Board of Direct Taxes (CBDT) clarified that the onus of withholding the TDS lies with the person making the payment to the seller — a buyer, an exchange or a broker. This implied that the TDS needs to be deducted from the selling price and after deducting the TDS amount and the rest can be paid or transferred to the seller.
In instances where the transaction of VDAs is carried out directly between the buyer and sellers without the involvement or exchange of a broker, the buying party will be required to deduct the tax under Section 194S of the IT Act.
In the transfer of VDA is through a broker or an exchange, the tax deduction will be made by the exchange, which is crediting or making payment to the seller. In cases that involve a broker, who is not the seller, the onus of tax deduction will be on both the broker and the exchange, provided there's no prior written agreement between the parties.
When VDAs being sold are primarily owned by an exchange, it can enter into a written agreement with the buyer or his broker that regarding all such transactions the exchange would pay the tax.
For the transfer of VDA in exchange for kind, the buyer will be required to release the consideration in kind after the seller provides proof of payment of such tax. For VDA for VDA transactions, both buyer and seller need to pay tax with respect to the transfer of VDA and show the evidence to each other so that VDAs can then be exchanged. The transaction will then have to be reported in the TDS statement along with the challan number, by filling up Form 26Q.