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.
In order to deduct that one percent and subsequent payment of Tax Deducted at Source (TDS) to the Government, it is crucial to have the PAN number of the Seller or counterparty. However, a common problem on various popular peer-to-peer (P2P) platforms such as Binance, Paxful, etc is the reluctance of counterparties to share their PAN numbers. Section 206AA of the Income Tax Act specifically deals with this situation, providing provisions for TDS deductions without PAN Card.
Table of Contents
- Section 206AA of Income Tax Act
- What is Section 206AA of the Income Tax Act?
- Rate of TDS
- What are the transactions and who is required to deduct tax when the transfer of Crypto is made?
- We are reproducing below Section 206AA verbatim from the Income Tax Act for your reference.
Section 206AA of Income Tax Act
Effective from 01/04/2010, Amendments to Income Tax Act mandate the deduction of tax at a higher rate, either the prescribed rate or 20%, for individuals who fail to submit their Permanent Account Number (PAN). The Finance (No.2) Bill, 2009 introduced section 206AA in the Income-tax Act, 1961 (ITA), which states that recipients of income must provide their PAN, or tax registration number, to the payer. Starting from the new financial year, individuals without a PAN will be subject to a higher income tax deduction at source, equivalent to the prescribed rate or 20%, for all transactions that fall under tax deduction at source (TDS) regulations.
What is Section 206AA of the Income Tax Act?
A taxpayer who has been entitled to get any sum known to be eligible for the TDS needs to quote the PAN to the taxpayer responsible for paying such a sum of income. The failure of the PAN quotation would result in the TDS deduction at a higher rate. Section 206AA is valid for the resident taxpayers and the NRI taxpayers.
It requires every recipient of income to provide their Permanent Account Number (PAN) to the payer. PAN is a unique ten-digit alphanumeric identifier issued by the Income Tax Department of India.
Rate of TDS
Under the said Section 206AA, if a recipient of income fails to furnish their PAN to the payer, the payer is obligated to deduct tax at a higher rate. The higher rate is the higher of the following:
- The rate prescribed in the relevant provisions of the Income Tax Act.
- At the rate that is at force.
- The rate of 20%.
This provision aims to ensure that individuals have a PAN and that it is provided for all financial transactions that fall under the purview of tax deduction at source (TDS). It helps in tracking and monitoring financial transactions, ensuring tax compliance, and preventing tax evasion.
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.
We are reproducing below Section 206AA verbatim from the Income Tax Act for your reference.
206AA. Requirement to furnish Permanent Account number
(1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely: —
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent.
(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.
(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).
(4) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.
(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.
(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.”