In India, the tax rules for cryptocurrencies are still evolving. However, as of 2022, the Indian tax department has issued guidelines stating that cryptocurrencies are to be treated as capital assets and are subject to capital gains tax. This means that starting from Financial Year 2022 - 23, if an individual sells or disposes of their cryptocurrencies, they they will be liable to pay tax on any gains made from the sale. Further, another section for TDS - 194S has been introduced in the budget which became effective from July 1, 2022. According to this section, it is mandatory for the buyer of a virtual digital asset or crypto currency to deduct One percent of the amount paid to the seller (Indian resident). This has caused a lot of confusion in the minds of traders around TDS rule on Crypto Currencies for P2P (Peer-to-Peer) transactions. So, the Income tax Department has recently issued a circular regarding the same to clarify this TDS rule.
From 1st July 2022, section 194S requires a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA) / Crypto / Crypto Currency / USDT / etc, to deduct an amount equal to 1% of such sum as income tax thereon. VDA covers all cryptocurrencies such as USDT, Bitcoin, Ethereum, BNB, Shibu Inu, Solana, and Dogecoin, etc that are being traded on P2P (Peer-to-Peer) Platforms.
What are the transactions and who is required to deduct tax when the transfer of Crypto is made?
According to the this new section, it requires the person who is paying the consideration to deduct tax. Following are the scenarios in which TDS will be deducted:
- P2P (Peer-to-Peer) transactions between buyer and seller where crypto exchange platform simply acts as a platform, TDS will be deducted by buyer of the seller, since the consideration is paid directly by the buyer to the seller.
- In case where the consideration is paid by buyer to the exchange and exchange pays to the seller, then:
a. If seller is the owner of the Crypto then exchange will deduct TDS of the seller.
b. If exchange is the owner of the Crypto, then the exchange may enter into written agreement with the buyer that the exchange will pay the tax and in such a case the exchange is required to show all the transactions in his income tax return.
- In case where the consideration is in kind, for example: Mr. A purchases USDT from Mr. B by paying in ETH. Here, Mr. A is selling ETH and buying USDT and Mr. B is buying ETH and selling USDT hence both A and B are buyers and sellers. Therefore, the exchange will deduct tax of both A and B. In the above case, 1% of USDT and 1% of ETH will be deducted by the exchange at the time of trading and it will be converted into INR based on the market rate existing at that time.
TDS under 194S would NOT be applicable in the following cases:
1. Where the consideration is payable by a specified person and the value or aggregate value of such consideration does not exceed 50,000 rupees during the financial year.
2. Where the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed 10,000 rupees during the financial year.
3. It is also mentioned that once TDS has been deducted by the person making payment, the payment gateway through which the person is making payment is not required to deduct tax under 194S. No double deduction of TDS.
4. No TDS when a person deposits or withdraws money from his account with the exchange.
Trading of crypto currency in India started from the Financial Year 2012-2013 and for many many years this sector was unorganised with multiple small exchanges (many of whom has since went bust). It was not possible for the government to tax crypto currency transactions until this law was brought. Now with the introduction of this section it is an attempt by the government to bring this sector into the tax ambit. There is flat 30% tax on transfer / sale of crypto currency and 1% TDS on purchase and sale for P2P (Peer-to-Peer) transactions. When this section was introduced in the budget there were many issues raised as to the applicability of this section, but with this latest circular most of the issues now stand resolved. Though we feel that the successful implementation of this section lies in the hands of the exchanges and crypto currency buyers.