Section 194s tds on virtual digital asset transactions example
Section 194S of Income Tax Act
With the advent of virtual digital assets, or VDAs, as seen with instances of popular cryptocurrencies and even non-fungible tokens (NFTs), the Indian government by Finance Act, 2022 has inserted a new section in Income Tax Act, Section 194S to provide for Tax Deducted at Source for payment of transfers of VDAs towards ensuring correct tax compliance in such digital transactions.
The TDS under Section 194S-about its applicability, conditions, rates, and practical illustrations-will be discussed in this article, which includes some of the important clarifications issued by the Income Tax Department.
In this regard, the department has issued Circular No. 14 of 2022 (CBDT), and a summary is given below
[Circular No. 14 of 2022 issued by the CBDT clarifies the provisions of TDS under section 194S of the Income-tax Act, 1961, which was introduced by the Finance Act, 2022, effective from July 1, 2022. This section mandates a 1% TDS deduction on payments made to residents for the transfer of Virtual Digital Assets (VDAs). The tax deduction applies at the time of credit or payment, whichever is earlier. However, no TDS is required if the consideration does not exceed ₹50,000 for specified persons or ₹10,000 for others. Specified persons include individuals or HUFs without business income or those with business turnover below ₹1 crore (or ₹50 lakh for professionals). The CBDT, under Section 194S(6), issued guidelines in Circular No. 13 of 2022 for transactions via exchanges, while Circular No. 14 covers other transactions.
For transactions outside exchanges, the buyer must deduct TDS and deposit it as per Income-tax Rules, 1962. In peer-to-peer transactions, the buyer is responsible for TDS compliance, and specified persons must report transactions in Form 26QE. TDS applies only on consideration excluding GST. If consideration is in kind or exchanged for another VDA, the payer must ensure TDS payment before releasing the asset. In VDA-to-VDA exchanges, both parties act as buyers and sellers and must pay TDS before completing the exchange. Reporting is required in Form 26Q, and specified persons use Form 26QE.
Additionally, once TDS is deducted under Section 194S, no further deduction is needed under Section 194Q. The circular provides necessary clarifications for proper implementation of Section 194S and ensures compliance in both cash and non-cash transactions involving VDAs.]
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Key Provisions of Section 194S
1. Applicability of TDS on VDAs
- Any person responsible for paying consideration to a resident for the transfer of a virtual digital asset must deduct TDS at 1%.
- This deduction applies at the time of credit to the recipient’s account or at the time of payment, whichever is earlier.
2. Mode of Consideration
If the payment for VDA transfer is:
- Wholly in kind or in exchange for another VDA, the payer must ensure that the TDS is deposited before releasing the consideration.
- Partly in cash and partly in kind, and if the cash component is insufficient for TDS deduction, the payer must ensure TDS is deposited before the transaction.
3. Exemptions Under Section 194S
TDS under Section 194S is not applicable if:
- The payer is a specified person and the total transaction value is less than ₹50,000 in a financial year.
- The payer is any other person and the total transaction value is less than ₹10,000 in a financial year.
4. Exemption for Specified Persons
A specified person refers to:
- Individuals or Hindu Undivided Families (HUFs) with a business turnover below ₹1 crore or a professional receipt below ₹50 lakh in the previous financial year.
- Individuals or HUFs who do not have income under the head “Profits and Gains from Business or Profession”.
5. Relationship with Section 194-O
If a transaction falls under both Section 194S and Section 194-O, then TDS will be deducted under Section 194S.
6. Guidelines and Clarifications
- CBDT Circular No. 14 of 2022 provides clarity on the implementation of Section 194S.
- If any difficulty arises in applying these provisions, the Central Board of Direct Taxes (CBDT) may issue guidelines with government approval.
Example of TDS on Virtual Digital Asset Transactions
Example 1: TDS on Crypto-to-Cash Transaction
Mr. A sells Bitcoin worth ₹1,00,000 to Mr. B. As per Section 194S:
- Mr. B must deduct 1% TDS (₹1,000) before paying the remaining ₹99,000 to Mr. A.
- Mr. B should deposit this ₹1,000 as TDS with the income tax department.
- Mr. A will receive credit for this TDS while filing his income tax return.
Example 2: TDS on Crypto-to-Crypto Transaction
Mr. X exchanges Ethereum (ETH) worth ₹2,00,000 with Mr. Y’s Bitcoin (BTC) worth ₹2,00,000.
- Since the transaction is wholly in kind, both parties must ensure that TDS of ₹2,000 (1% of ₹2,00,000) is deposited before exchanging assets.
- Failure to comply may result in penalties for both parties.
How to Deposit TDS on Virtual Digital Assets
The government has introduced Form 26QE & 16E for TDS deposit on VDAs.
Steps to Deposit TDS on VDA Transactions:
- Calculate TDS at 1% of the transaction value.
- File Form 26QE (for individuals and HUFs) or 16E (for other entities).
- Deposit the deducted TDS through the income tax portal.
- Ensure timely filing of TDS returns to avoid penalties.
Importance of TDS on Virtual Digital Assets
- Ensures proper tax compliance in digital asset transactions.
- Prevents tax evasion in cryptocurrency and NFT markets.
- Provides legal clarity on taxation for digital asset investors and traders.
Conclusion
Section 194S is, therefore, an important provision to ensure proper TDS deduction on the transactions in Virtual Digital Assets. Through its structured guidelines and exemptions, it aids in tax regulation of digital assets while keeping taxpayers in compliance with the law.
It is important for VDA professionals and investors to understand these regulations to avoid operational inconveniences and penal consequences.
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