Following the introduction of a 30% tax rate by the Government in the Union Budget 2002-23, cryptocurrency sales transactions will attract an additional tax deducted at source (TDS) of 1%, starting July 1, 2022.
The TDS deductibility will apply to all virtual digital assets (VDA) transactions, including cryptocurrencies and non-fungible tokens worth over ₹ 10,000. VDA, as defined in the Income Tax Act’s new clause 47A, is any information, code, or number, other than Indian currency or any other foreign currency that is generated by cryptographic or another means. This definition includes non-fungible tokens and similar tokens.
What Does TDS On Crypto, VDA Say?
In the Union Budget 2022-23, Finance Minister Nirmala Sitharaman announced a 1% TDS on crypto assets. While cryptocurrency enthusiasts were disappointed by the move, a new ambiguity arose after the Income Tax Department website stated that the TDS on virtual digital assets had been reduced to 0.1% from the original 1%. The IT department, however, on June 22 clarified that TDS for virtual digital assets will still be at 1%, as stated in the Union Budget.
Now let’s understand how TDS on crypto and virtual digital assets will be applicable at the time of buying and selling!
The Central Board of Direct Taxes clarified that the buyer, exchange, or broker is responsible for withholding TDS. The TDS must be deducted from the sale price. After deducting the TDS amount, the remainder can be paid to the seller or transferred to him.
If VDA transactions are made directly between buyers and sellers, without the involvement of a broker or exchange, the buying party must deduct the tax pursuant to Section 194S IT Act.
If the VDA is transferred through a broker, exchange, or other intermediaries, the exchange will be responsible for the TDS on VDAs as it would be an exchange that would credit the seller or make payment. If the transaction involves a broker who is not the seller of VDA, both the broker as well as the exchange will have to deduct the tax in absence of any written agreement.
VDAs that are being sold and are owned primarily by an exchange, an exchange can make a written agreement to pay tax for all transactions.
However, in cases where VDA is transferred for kind, the buyer must release the consideration in kind after the seller provides proof of payment for the VDA. VDA transactions require that both the seller and buyer pay the tax and provide evidence so that VDAs may be exchanged. By filling out Form 26Q, the transaction must be reported in the TDS Statement along with the challan numbers.
One of the primary reasons for bringing VDA under the land of tax is the increasing investment in cryptocurrency. Over the years the increasing popularity of some of the popular cryptocurrencies, especially Bitcoin and Ethereum, has attracted the eyeballs of lawmakers. However, the decision to impose a 30% tax and 1% TDS on cryptocurrency has not gone well with the startups operating in the crypto space in India. They have questioned the intent of the government to impose a tax without safeguarding their investment and interests. Asa result, many crypto, and blockchain-based startups have already shifted their base from India to Dubai, UAE which has recently introduced crypto-friendly policies for startups.