The CBDT (Central Board of Direct Taxes) has shared clear guidelines on the newly introduced TDS on crypto transfers which will be applicable from July 1. 

The guideline was published on 22nd June evening, and in this blog and we’ll break it down for Blockmagic readers.

The Income Tax department has published much-needed guidelines to throw out difficulties and simplify the operations of Section 194S of the Income-tax Act, which submitted TDS liability in cases of transfer of Virtual Digital Assets (VDA).

As per the Section, any person purchasing VDA is required to charge 1% TDS on the total consideration being paid to the seller of the VDA. These guidelines describe the operation of this TDA liability in distinct situations, including if the transaction is completed on an exchange, through a broker, or if the transaction is a VDA to INR or VDA to another VDA transaction.

These guidelines are relevant only for transfers on crypto exchanges in India. Moreover, “It is appropriate to note that these guidelines are only useful in cases where transfer of VDA is furnishing on or through an exchange, except the guideline relating to the analysis of the total consideration being paid for the VDA.”

Four central learning from the guidelines:

1. When the exchange owns the VDA that is being transferred 

Though the primary liability to charge TDS is on the buyer. Still, the exchange may sign a written agreement with the buyer or the broker (platforms holding brokerage accounts with exchanges to furnish trades) and can comply with this need independently. 

2. When VDA is being gowned by a person other than the exchange

The only exchange will deduct TDS if money is credited to the seller’s account directly. However, if there is also a broker involved, the broker is the owner and seller. Therefore, the exchange will deduct TDS while making payment to the broker, and the broker will also charge TDS while paying to the customer who is selling VDA.

If the broker is not a seller, this means that he is only executing the customers’ orders through his platform, then the liability to deduct TDS will also be on both – the exchange and the broker. But, in this scenario, the broker alone may deduct TDS if there is a written agreement about this between the exchange and broker.

3. When VDA is shared in exchange for another VDA or any review ‘in kind’

The person held responsible for paying such consideration is required to deduct TDS. For example, if VDA is exchanged for another VDA, both the persons involved are buyers and sellers; therefore, both are needed to deduct TDS with a certain percentage. If the contemplation is in VDA, the TDS will be made in terms of VDA only and will further be converted into INR.

If such transactions are completed through an exchange, the exchange may deduct tax on both legs of the transaction. The exchange will deduct TDS in VDA and immediately convert all VDAs into one of the primary VDAs (BT, ETH, USDT, USDC). All the TDS collected in primary VDA throughout the day will be converted into INR at 00.00 hours.

4. Government shall deduct TDS on ‘net’ consideration after excluding GST/charges imposed by the deductor for rendering service

These guidelines show an underlying sense of reassurance to keep individual investors as the obedience obligation has been shifted to the exchanges to the bit possible. 

However, in the case of P2P and other transactions that do not involve any exchange, these policies are inappropriate. 

Section 194 will still apply as it is—specifying the mechanism to transform VDA deducted as TDS into INR supplies much-needed clarification for exchanges and is likely to be embraced by individual investors and other stakeholders while doing transactions without an exchange. 

Also, the terms ‘exchange’ and ‘broker’ have been clearly defined in the guidelines. Still, whether and how the government will enforce these compliances on the foreign exchanges operating in India is unclear.