All About TDS Under Section 194s of the Income Tax Act

Section 194S was a newly inserted section of the Income Tax Act, 1961, by the government through CBDT Circular No. 13/2022. Which talks about 194S TDS applicability on Virtual Digital Assets (VDAs). This provision came into force on July 1, 2022.

The Finance Act of 2022 introduced a new Tax Deducted at Source (TDS) provision under Section 194S of the Income Tax Act, 1961 to tax such virtual assets. However, the Government has not specified how these virtual assets will be treated, whether they will be treated as money, commodities, or securities, and they are not subject to regulation.

Let’s discuss more about TDS under Section 194S of the Income Tax Act.

What Is Virtual Digital Asset (VDA)?

Virtual digital assets are any assets that are not fungible or in the form of currency that has been announced by the central government in the official gazette.

A virtual digital asset, or VDA, transfer must be subject to TDS under Section 194S. The following VDA includes the following provisions for the purposes of Section 194S.

1. Cryptocurrency typically contains information, a code, a number, or a token generated through cryptographic means.
2. NFT stands for Non-Fungible Token, and any other token of a similar nature can be used. A non-fungible token is a virtual asset on a blockchain with a unique identification code and metadata to distinguish it from other virtual assets.
3. Any other digital asset that the central government has published in the official gazette.

Example of TDS Deduction Under Section 194S

The Income-tax Act of 1961 (ITA) was amended to include Section 194S on July 1 of 2022 as a result of the Finance Act of 2022.

A provision has been introduced for a 1% TDS deduction on payments made on the transfer of virtual digital assets (VDAs), which includes trading in cryptocurrencies and non-fungible tokens (NFTs). This is applicable if the transaction value exceeds Rs 10,000 or Rs 50,000 in the case of specified persons in a financial year.

Let’s take one example to have a clear idea about the transaction.

Assume that you want to purchase a cryptocurrency worth Rs. 100,000. You will need to deduct TDS at 1% of Rs. 100,000 from your payment and give the seller the remaining Rs. 99,000. You must make a deposit of Rs. 1,000 with the government. Such TDS of Rs. 1,000 need to be reported in Form 26Q to the government.

When TDS Under Section 194S Is to Be Deducted?

Virtual digital assets (VDAs), such as cryptocurrencies and non-fungible tokens (NFTs), are the subject of TDS under Section 194S. This clause requires the deduction of tax at the rate of 1% of the total income tax by anyone responsible for paying a resident any amount as consideration for the transfer of any VDA. 

The rule only applies to transactions where the value of a VDA transaction exceeds Rs. 10,000 or Rs. 50,000 for the specified person in a given year. This threshold limit is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.

The TDS must be deducted at the earlier time of payment or the time the amount is credited to the resident's account. Form 26Q must be used to report TDS to the government under section 194S. Additionally, the TDS deduction must only be made if the recipient of the payment is an Indian resident.

Who Is a Specified Person?

When the payment for the transfer of VDA exceeds Rs. 50,000 during a financial year, TDS under section 194S applies to the specified person. Who is a "specified person" as defined under the explanation of Section 194S?

The term "specified person" means

• An Individual or a Hindu Undivided Family (HUF) whose gross receipts, total sales or turnover from the business they are operating during the financial year prior to the Financial year  in which the virtual digital assets are transferred do not exceed Rs. 1 crore; and
• An individual or HUF with annual professional receipts of not more than Rs. 50 lakh in the F.Y. prior to the F.Y. in which the VDA is transferred;
• An individual or a Hindu Undivided Family (HUF) who receives no income under the heading of "Profits & Gains of Business or Profession".

It should be noted that subsection 6 of Section 194S gives the Central Board of Direct Taxes (CBDT) the authority to issue regulations with the prior consent of the Central Government in order to address any issues that may arise when implementing the TDS provision under section 194S.

What If the Consideration For Transfer of VDA Is in Kind?

There will be two possibilities for paying consideration for the transfer of the virtual asset:

When the entire consideration is in kind;

When no part of the consideration is paid in cash, but is instead entirely in kind or is exchanged for another virtual digital asset;

When the consideration is partially in cash or partially in kind;

When the consideration is partially paid in cash or in kind, but the amount paid in cash is insufficient to pay the full amount of taxes due on the transfer;

In these circumstances, before releasing the consideration for the transfer of VDA, the person paying the consideration must ensure that the necessary tax has been deposited to the government.

Who Is Responsible for Deducting TDS Under Section 194S?

On the transfer of the VDA, the person in charge of paying the bill deducts TDS in accordance with Section 194S. Since the transfer of VDA occurs over a digital exchange, the seller is unknown to the buyer.
The income tax department released a circular to clarify the role of brokers and cryptocurrency exchanges with regard to TDS deductions

on the sales of VDAs and cryptocurrencies because TDS under Section 194S required some clarification. As discussed below, there were various scenarios that involved the obligation to deduct TDS:

If a VDA is transferred via peer-to-peer (P2P)

The buyer is primarily responsible for deducting TDS in a P2P transfer. Additionally, the purchaser must report the deduction by submitting Form 26Q or 26QE.

VDA is transferred on or through an Exchange but such VDA is owned by someone other than the Exchange

Case-1: If the transaction occurs directly with Exchange

In this case, the exchange receives payment from the buyer either directly or through a broker, it will be the responsibility of the Exchange to deduct TDS and file Form 26Q on the buyer's behalf. Following that, a broker facilitates payment between the Exchange and the seller.

Case-2: If the transaction is done through a Broker

In this case, the broker is distinct from the seller, and both the Exchange and the Broker are responsible for withholding TDS. However, for the broker to be able to deduct taxes from credits or payments and the broker says that he will comply with 194S TDS provisions, there will be no requirement of Section 194S TDS compliance on the part of Exchange. For that, a written agreement between the exchange and the broker is required.

VDA transfer on or through an Exchange where the Exchange owns the VDA

Case-1: If the buyer makes the payment directly to the exchange

If we go as per the plain reading of the rules applicable for TDS deduction under Section 194S, the buyer who pays the consideration to the Exchange for purchasing a VDA will be required to deduct the TDS while paying the consideration to the Exchange.

If the buyer makes the payment directly to the exchange, then the buyer is primarily responsible for withholding TDS, and the exchange may pay the tax if the exchange and the buyer have a written agreement specifying that the exchange will pay tax on such credit or payment. In such a case, the Exchange is required to file Form 26QF  for all such transactions of the quarter on or before the due date prescribed in the Income Tax Rules, 1962. In addition to this, the Exchange would also be required to furnish its income tax return and all these transactions must be included in such return.

Case-2: Where the buyer makes the payment through a Broker

In this instance, the buyer pays the Exchange via a broker, the broker deducts TDS, and the Exchange then pays the tax. A written agreement between the Exchange and the broker stating that the Exchange shall be responsible for paying tax on such credit is required for payment of tax by the Exchange. The Exchange also submits Form 26QF for all such transactions of the quarter on or before the due date prescribed in the Income Tax Rules, 1962. In addition to this, the Exchange would also be required to furnish its income tax return and all these transactions must be included in such return.

Transfer of VDA wherein the transfer's consideration is in kind

The plain rule of Section 194S says that the person responsible for paying such consideration is required to ensure that before releasing such consideration, the tax required to be deducted has been paid in respect of such consideration.

Case-1: If the transaction is not made through an exchange

In this case, the buyer will release the consideration in kind after the seller provides the challan and is responsible for deducting TDS if the transaction is not conducted through an exchange. Additionally, the buyer will file Form 26Q or 26QE.

Case-2: If the transaction is made through an exchange

If the transaction is made through an exchange, the exchange is responsible for withholding TDS. Furthermore, the Exchange is permitted to use the Alternate Mechanism (AM) in accordance with the written contract it has with the buyers and sellers and to deduct taxes for both legs of the transaction. In such a case, Form 26Q will also be filed by the Exchange.

If such an alternative mechanism is exercised,

The exchange would be required to deduct tax for both legs of the transactions and pay to the Government. For the reasons previously stated, it will be necessary to report it as tax deducted on both legs of the transaction in Form 26Q.

The procedure outlined in Section 194S of the Act's proviso to sub-section (1) would not be required of the buyer and seller separately.

Exemption Cases Where No Tax Is Required to Be Deducted?

The following situations are covered under TDS exemption under 194S.

• Where the consideration is due from a specified person and the total amount due during the financial year does not exceed Rs. 50,000;
• When the consideration is due from anyone other than a specified person and the total amount due during the financial year does not exceed Rs. 10,000.

TDS Rate Under Section 194S

Section 194S TDS rate is 1% of the total income tax by anyone responsible for paying a resident any amount as consideration for the transfer of any VDA. The rule only applies to transactions where the value of a VDA transaction exceeds Rs. 10,000 or Rs. 50,000 for the specified person in a given year. The TDS threshold for Section 194S limits is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.

TDS Under Section 194S Vis-à-Vis TDS Under Section 194Q

The TDS required by Section 194Q (applicable to the purchase of goods) would not be necessary if the tax was deducted in accordance with Section 194S of the ITA.

The Goods and Services Tax (GST) and other charges will be excluded from the net consideration before the tax is applied. 

Other Considerations Need to Know for TDS Under Section 194S

Due Date of Deposit of TDS

Issue of TDS Certificate For 194S

For the TDS deducted on the transfer of VDA, the deductor will issues a TDS certificate to the deductee in accordance with Form 16A or (Form 16E- in case where Form 26QE was filed by the deductor) within 15 days from the due date of furnishing the TDS Return for 194S.

In their income tax return, the deductee may claim a TDS credit. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with Section 194S.

Filing of TDS Return

According to Section 194S of the Income Tax Act, it is the deductor or the payer who is required to deduct TDS and comply with TDS filing under Section 194S. As a result, they must submit quarterly returns using Form 26Q or Form 26QE, as applicable, by the last day of the month following the end of the quarter. The following would be the due dates:

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