Section 194S: TDS on transfer of Virtual Digital Assets (VDA)

Overview

In India, the government has taken several steps to regulate and tax cryptocurrency transactions in recent years. One of the key provisions introduced in the Union Budget of 2022 was Section 194S of the Income Tax Act, which mandates the deduction of Tax Deducted at Source (TDS) on transactions involving the transfer of digital assets, including cryptocurrencies. This section is an important development for both taxpayers and businesses dealing with digital assets in India.

In this article, we’ll explore what Section 194S entails, who it applies to, and how it affects cryptocurrency transactions.

What is Section 194S ?

In the 2022 Union Budget, Finance Minister Smt. Nirmala Sitharaman announced the introduction of a new provision, Section 194S, which mandates TDS on the transfer of Virtual Digital Assets (VDAs) and Cryptocurrencies. The aim of this section is to enable the government to monitor transactions involving these assets. Under this provision, a TDS of 1% is required to be deducted on the transfer of a VDA, provided the transaction value exceeds ₹10,000.

What is a Virtual Digital Asset (VDA) ?

A Virtual Digital Asset (VDA) refers to any digital or virtual asset that is traded or transferred electronically, and is not recognized as legal tender or currency. This includes cryptocurrencies like Bitcoin and Ethereum, as well as non-fungible tokens (NFTs) and other similar assets that are stored or transferred through blockchain technology. VDAs do not have a physical form and are typically characterized by their use in online transactions or as investment assets, with their value being determined by market demand and supply.

As per Section 194S of the Income Tax Act, a Virtual Digital Asset (VDA) encompasses the following:

• Cryptocurrency: Digital representations such as information, tokens, numbers, or codes created using cryptographic techniques or other methods.
• NFTs: Non-fungible tokens or any similar type of token.
• Other Digital Assets: Any additional assets that the central government may notify in the official gazette.

Who is a specified person under Section 194S ?

TDS under Section 194S applies when the payment for the transfer of a Virtual Digital Asset (VDA) exceeds ₹50,000 for specified persons and ₹10,000 for others. A specified person is defined as:

• An individual or Hindu Undivided Family (HUF) without income from business or profession.
• Individuals or HUFs with business income not exceeding ₹1 crore.
• Individuals or HUFs with professional receipts not exceeding ₹50 lakhs.

No requirement of TAN: A specified person is not required to apply for or obtain a Tax Deduction or Collection Account Number (TAN) in order to deduct tax under this provision. The deductor can deduct and deposit TDS using his PAN instead of TAN.

When is TDS Deducted Under Section 194S?

Under Section 194S, the following rules apply for the deduction of TDS on the transfer of a Virtual Digital Asset (VDA):

• TDS must be deducted at the rate of 1% on payments made to a resident.
• If the payee fails to provide their PAN to the payer, the tax will be deducted at the rate of 20%, as specified under Section 206AA.
• The deduction should occur at the earlier of the following:
  • At the time of making the payment.
  • When the payment is credited to the recipient’s bank account.

The TDS deducted under this section must be reported to the government using Form 26Q. It's important to note that TDS is only applicable if the recipient is a resident of India. For non-residents provisions of Section 195 shall apply.

Example

Let’s say you are an individual buying Bitcoin worth ₹1,00,000 from a seller.

• The buyer (you) will deduct 1% of ₹1,00,000, which is ₹1,000, as TDS.
• The buyer then deposits this ₹1,000 with the government.
• The seller can claim this ₹1,000 TDS while filing their income tax returns, reducing their overall tax liability.

Who is Responsible for Deducting TDS u/s 194S?

The liability to deduct TDS under Section 194S varies depending on the specific case and the nature of the Virtual Digital Asset (VDA) transaction. Here’s a breakdown of the TDS responsibilities in different scenarios:

1. Peer-to-Peer (P2P) Transfer of VDA

• Buyer: The buyer is the primary person responsible for deducting TDS at 1%.
• The buyer must file Form 26Q and Form 26E.

2. Transfer of VDA through an Exchange (VDA not owned by the Exchange) in cash

Case 1: Payment made by Buyer to the Exchange (directly or through a broker)

• Exchange: The exchange is responsible for deducting TDS.
• The exchange must file Form 26Q.

Case 2: Payment made between Seller and Exchange through a Broker

• Broker and Exchange: Both the broker and the exchange are responsible for deducting TDS.
• TDS can be deducted by the broker if both the broker and exchange have a written agreement for the broker to deduct the TDS.
• The broker must file Form 26Q, and the exchange must file Form 26QF.

3. Transfer of VDA through Exchange (VDA owned by the Exchange)

Case 1: Buyer makes payment to the Exchange via a Broker

• Broker: The broker is primarily responsible for deducting TDS.
• The exchange can deduct TDS if both parties have a written agreement to that effect.
• The exchange must file Form 26QF and the Income Tax Return (ITR).

Case 2: Buyer credits or makes payment to the Exchange directly

• Buyer: The buyer is primarily responsible for deducting TDS.
• The exchange can pay the tax if there’s a written agreement that the exchange will deduct the TDS.
• The exchange must file Form 26QF and the ITR.

4. Transfer of VDA in Kind

Case 1: Transaction not through an Exchange

• Buyer: The buyer is the primary person responsible for deducting TDS.
• If the seller provides the challan for the transaction, the buyer can give consideration in kind.
• The buyer must file Form 26Q and Form 26QE.

Case 2: Transaction through an Exchange

• Exchange: The exchange is primarily responsible for deducting TDS.
• The exchange can deduct the tax based on a written contractual agreement between the parties involved.
• The exchange must file Form 26Q.

In summary, the responsibility for deducting and filing TDS depends on the transaction's nature and the parties involved. Whether it's a direct or broker-mediated transaction, the primary person to deduct the TDS is clearly defined, and appropriate forms need to be filed for compliance.

Time to Deposit TDS u/s 194S

By specified persons:

The tax deducted at source by a specified person must be deposited to the credit of the Central Government using Form 26QE within 30 days from the end of the month in which the tax was deducted.

By others:

TDS on transfer of VDA which is deducted u/s 194S and is required to be deposited to the central government. Time to deposit TDS u/s 194S is given below:

For example, TDS is deducted on 15th December and needs to be deposited on or before 7th January. Tax is deducted on 21st March ; needs to be deposited on or before 30th April.

Consequences of Default

Following are the consequences and penalties for non-compliance with section 194S:

A penalty may be imposed for failure to deduct the correct amount of TDS. The penalty can be equal to the amount of TDS not deducted or short deducted.

The penalty amount cannot exceed the amount of TDS required to be deducted.

If a deductor has not deducted the TDS as required under Section 194S, it charges interest of @1% per month till the date TDS is deducted.

If a deductor has deducted the TDS as required under Section 194S but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.

Person responsible for deducting TDS is required to furnish quarterly TDS Statement, failing which makes him liable for payment of fees u/s 234E, ₹200 per day subject to maximum amount of TDS.

Taxation of Cryptocurrency Post-TDS

The introduction of TDS under Section 194S does not change the fundamental taxation of Virtual Digital Assets. Income from the transfer of virtual digital assets is still subject to capital gains tax or business income tax, depending on the nature of the transaction.

• Short-term capital gains tax applies if the asset is sold within 36 months of purchase.
• Long-term capital gains tax applies if the asset is held for more than 36 months.

As the TDS deducted under Section 194S is treated as an advance tax payment, the transferor can adjust the amount of tax deducted against their total tax liability when filing their returns.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 194S of the Income Tax Act is a crucial step in regulating the taxation of virtual digital assets like cryptocurrencies in India. By mandating TDS on cryptocurrency transactions, the government is ensuring that tax is collected at the source, which not only improves tax compliance but also enhances transparency in the crypto market.

For individuals and businesses engaging in cryptocurrency transactions, it’s essential to understand the provisions of Section 194S to ensure compliance with the new tax regime. Keeping proper records of all transactions, including the TDS deducted, will be important for both buyers and sellers as they navigate the tax implications of their crypto dealings.

The introduction of this provision signals India’s ongoing efforts to bring clarity to the cryptocurrency space while ensuring that the industry remains compliant with tax laws.

Frequently Asked Questions? (FAQs)