All you need to know about crypto TDS guidelines 

The Central Board of Direct Taxes (CBDT) has issued a detailed guideline on the newly introduced TDS on crypto transfers which would be applicable from July 1. The guideline was issued on Wednesday evening and Purushottam Anand, Advocate and Founder of Crypto Legal breaks it down for Business Today readers.

 Anand told Business Today, “The Income Tax department has issued much-needed guidelines to remove difficulties and clarify the operations of Section 194S of the Income-tax Act which introduced TDS liability in cases of transfer of Virtual Digital Assets (VDA). “

He also added, “As per the Section, any person buying VDA needs to deduct 1% TDS on the consideration being paid to the seller of the VDA. These Guidelines explain the operation of this TDS liability in different situations including if the transaction is done on an exchange, through a broker or if the transaction is a VDA to INR or VDA to another VDA transaction.”

Anand stressed on the fact these guidelines are relevant only for transfers that take place on crypto exchanges in India. He said “It is pertinent to note that these guidelines are only applicable in cases where transfer of VDA is taking place on or through an exchange, except the guideline relating to computation of the aggregate consideration being paid for the VDA.”

Anand listed four main takeaways from the guidelines. He explained them as follows:

1. When the VDA being transferred is owned by the exchange itself 

Though the primary liability to deduct TDS is on the buyer, but exchange may sign a written agreement with buyer or the broker (platforms holding brokerage accounts with exchanges to execute trades) and can comply with this requirement on their behalf.

2. When VDA being transferred is owned by a person other than the exchange -

Only exchange will deduct TDS if money is credited to the account of the seller directly. If there is also a broker involved and the broker is the owner and seller, then the exchange will deduct TDS while making payment to the broker and broker will also deduct TDS while making payment to the customer who is selling VDA.

If the broker is not a seller, meaning thereby he is only executing the orders of the customers through his platform, then also the liability to deduct TDS will be on both - exchange and the broker. But, in this scenario, broker alone may deduct TDS if there is a written agreement about this between the exchange and broker.

3. When VDA is transferred in exchange of another VDA or for any consideration ‘in kind’ -

The person responsible for paying such consideration is required to deduct TDS. If VDA is exchanged for another VDA, both the persons involved are buyer as well as seller and, therefore, both are required to deduct TDS. If the consideration is in VDA, the TDS will be deducted in terms of VDA only and will subsequently be converted into INR.

If such transactions are done through an exchange, alternatively, the exchange may deduct tax on both legs of the transaction. Exchange will deduct TDS in VDA and will immediately convert all VDAs into one of the primary VDA (BT, ETH, USDT, USDC). All the TDS accumulated in primary VDA throughout the day will be converted into INR at 00.00 hours.

4. TDS shall be deducted on ‘net’ consideration after excluding GST/charges levied by the deductor for rendering service.

These guidelines exhibit an underlying purpose of giving relief to retain individual investors as the compliance burden has been shifted to the exchanges to the extent possible. However, in the case of P2P and other transactions which do not involve any exchange, these guidelines are not applicable and the provision of Section 194 will still apply as it is. Prescribing the mechanism to convert VDA deducted as TDS into INR provides much-needed clarification for exchanges and is likely to be also adopted by individual investors and other stakeholders while doing transactions without an exchange. Also, the terms ‘exchange’ and ‘broker’ has been clearly defined in the guidelines now, but, it is not clear whether and how these compliances will be enforced on the foreign exchanges operating in India.  

(With inputs from Purushottam Anand.)

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