Section 194S of the Income Tax Act was introduced to regulate taxation on transactions involving Virtual Digital Assets (VDAs), including cryptocurrencies and non-fungible tokens (NFTs). The provision ensures tax compliance in the rapidly growing digital asset market by mandating TDS on specified transactions.
Specified Person under Section 194S
- Individuals or Hindu Undivided Families (HUFs) without income from ‘profits and gains of business or profession’.
- Individuals or HUFs with business income up to ₹1 crore.
- Individuals or HUFs with professional receipts up to ₹50 lakh.
Additionally, the Central Board of Direct Taxes (CBDT) has issued guidelines clarifying TDS deduction rules for VDA transactions.
TDS Rate & Threshold Limit
- TDS Rate: 1% on the consideration paid for the transfer of VDAs.
- If the payee does not furnish his/her PAN, tax has to be deducted at 20%.
- Threshold Limit:
- ₹50,000 per financial year for specified persons
- ₹10,000 per financial year for other individuals and entities.
- Forms: Form 26Q in case of other persons and Form 26QE in case of specified persons.
Time of Deduction
- TDS must be deducted at the time of credit or payment, whichever is earlier.
Who fulfils compliance?
- Obligation on Payer: The buyer is responsible for deducting TDS before making payment for VDAs.
- P2P Transactions: In peer-to-peer (P2P) transactions, the buyer must ensure TDS compliance before transferring the amount to the seller.
- Exchange-Mediated Transactions: If the transfer occurs via an exchange, the exchange is responsible for deducting and depositing TDS.
- TDS Deduction on Barter Transactions: If the transaction involves an exchange of one VDA for another, both parties must ensure tax compliance.
- TDS Deduction in Multi-Party Transactions: If a VDA transaction occurs through an exchange that does not own the asset, multiple parties may be involved in the transaction chain. The exchange facilitating the payment to the seller holds the primary responsibility for TDS deduction. However, in cases where the transaction is routed through a broker, both the exchange and the broker share the obligation for tax deduction.
- Agreement for TDS Deduction: The exchange and broker can mutually decide that the broker will handle all TDS deductions. In such cases, the exchange must file a quarterly report in Form 26QF before the due date.
Example Scenarios
Scenario 1: Purchase Through an Exchange
- Buyer purchases cryptocurrency worth ₹1,00,000 through an exchange.
- Exchange deducts ₹1,000 (1% of ₹1,00,000) as TDS before crediting the seller.
- Exchange deposits ₹1,000 with the government and issues a TDS certificate.
Scenario 2: Peer-to-Peer (P2P) Transaction
- A person buys cryptocurrency worth ₹30,000 directly from another individual.
- Buyer must deduct ₹300 (1% of ₹30,000) before making payment.
- The deducted amount is deposited with the government.
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