TDS: Buyers of virtual digital assets bear responsibility

With effect from July 1, 2022, a new section, 194S, was added to the Income Tax (I-T) Act, 1961 by the Finance Act. The purchaser of a virtual digital asset (VDA) is required by this section to make sure that tax is withheld at source (TDS) at a rate of 1% of the sale price. This simply means that, in the event that Arun sells Anand some Ethereum, Anand will have to subtract tax from the purchase price that is due to Arun.

However, in reality, VDA transactions happen through an exchange, often known as a platform or application for exchanging VDAs. An exchange is not the buyer; it is merely the intermediary. The buyer, not the exchange, is technically responsible for the TDS deduction. Nevertheless, the money is transferred from the buyer to the exchange, then from the exchange to the seller. Therefore, the Central Board of Direct Taxes (CBDT), Ministry of Finance, GoI has issued Circular Number 13 dated June 22 and clarified certain scenarios for deduction of TDS in order to remove obstacles for transactions taking place through an exchange.

Suppose, Sanjay uses platform Z to sell Bitcoin to Kalpesh for Rs. 1 lakh. Assume that platform Z will charge you 1,000 for this transaction. Platform Z will be needed in this situation to deduct TDS from the net consideration after subtracting GST, levies, and commission. Therefore, Z will deduct 990 (or 1% of the $99,000 in net consideration) as TDS.

In such circumstances, the exchange owns the VDA. The exchange itself serves as the vendor in this instance. The purchaser, however, might not be aware that the exchange is not just a platform; it also owns the VDA; as a result, the purchaser must deduct TDS from the consideration due to the exchange. In this situation, the exchange and the buyer may agree in writing that the exchange will pay all applicable taxes on or before the due date for that quarter with respect to all such transactions.

In reality, a large number of exchange transactions where one VDA is traded for another occur. As an illustration, Surana trades Suchak 1 lakh units of cryptocurrency C for 2 lakh units of cryptocurrency D. The exchange Z is where the transaction happens. In this instance, Suchak is the seller for C and the buyer for D.

When the payment is made in kind, the person in charge of doing so must make sure that the tax that must be deducted has been paid in relation to the payment before releasing the payment. To exchange VDAs, both parties must first pay tax on the transfer of the VDA and provide each other with the necessary documentation. However, because the transaction goes through Z, there can be operational challenges. Therefore, depending on a documented contract with the purchasers or sellers, Z may deduct tax.

However, how will Z deduct the tax if there is no rupee transfer? Z must then subtract 1 percent from each cryptocurrency, which will amount to 2,000 units of D being deducted and 1,98,000 units of D being remitted to Surana and 1,000 units of C being deducted and 99,000 units of C being remitted to Suchak. After that, Z should exchange these 2,000 units of D and 1,000 units of C for rupees and deposit the TDS with the Central Government. Z is once more the seller when C and D are converted to rupees.

This sale by Z won’t be subject to TDS, nevertheless, as this conversion is done to deposit the TDS with the government.

It is important to remember that the exchange must keep the necessary records in all of the aforementioned situations and submit filings using the correct forms.