TDS on Virtual Digital Assets

The Central Board of Direct Taxes (CBDT) recently issued detailed guidelines on the tax deducted at source (TDS) rule for virtual digital assets (VDAs) such as cryptocurrencies. It lays out the various scenarios on how the tax will be applicable and who will bear the onus to deduct it.

What is the plan?

With the addition of Section 194S to the Income-tax Act via the Finance Act of 2022, a 1% TDS will be levied on transfers of VDAs beginning July 1 if the value of transactions exceeds Rs 10,000 in a year.

Guidelines issued –

• In various cases, the CBDT has defined who is responsible for deducting the tax.
  • • For example, if a VDA transfer occurs on or through an exchange and the VDA being transferred is not owned by the exchange, tax may be deducted by the exchange when it pays the seller.
    • This mainly deals with situations where the transfer of a VDA is being made against money.
• The CBDT has also provided examples of cases in which a VDA is transferred in exchange for another VDA.
  • • For example, if two different cryptocurrencies, such as Bitcoin and Ether, are exchanged, both parties are considered buyers and sellers.
    • As a result, both will have to pay tax on the cryptocurrency transfer.
    • In these cases, the guidelines also allow exchanges that facilitate such transactions to deduct tax.
• Additionally, the CBDT has defined four primary VDAs – Bitcoin, Ether, USD Tether and USD Coin, for the purpose of tax deduction on lesser-known cryptocurrencies.

About virtual digital assets –

• According to the Finance Act, a virtual digital asset means any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise. The definition includes non-fungible tokens (unique and can’t be replaced with something else) as well as other tokens of a similar nature.
• It provides a digital value that is exchanged for, with the promise of having inherent value or functions as a store of value or a unit of account and includes its use in any financial transaction or investment.
• This means, it is not limited to investment schemes and can be transferred, stored or traded electronically.

How are virtual digital assets different from digital currency?

• A currency is a currency only when it is issued by the central bank (RBI in India) of that country.
• If a virtual currency (be it a cryptocurrency) is recognised by the central bank it is known as the Central Bank Digital Currency (CBDC).
• CBDCs are the virtual or electronic form of fiat currencies (like the Indian rupee). Hence, a CBDC is the legal tender issued by a central bank in a digital form.
• CBDC cannot be compared to the private virtual currencies (VCs) that have proliferated in the last decade.
• VCs are not money (certainly not currency), as the term has historically been understood.