Decoding the Indian Crypto Taxation Policy

Following the 30% tax rate imposed by the government in the Union Budget 2022–23, the Finance Ministry recently levied an additional 1% tax deducted at source (TDS) on all Virtual Digital Asset transactions, which will be in force from 1st July 2022. As per Sec — 47A of the Income Tax Act, 1967, Virtual Digital Asset is defined as any information, code, number, or token created using cryptography or other means, except Indian or any other foreign money.

The Central Board of Direct Taxes (CBDT) clarified that TDS will be charged by exchanges on behalf of sellers who will deposit the tax on the exchange platforms. The individual making the payment to the seller — a buyer, an exchange, or a broker will be responsible for withholding the TDS. This means that the TDS must be deducted from the selling price, and the remaining can be paid or transferred to the seller after deducting the TDS amount. The CBDT guidelines also indicate that the person responsible for paying the tax deduction shall provide the payee with a TDS certificate within 15 days of the statutory date for reporting it to the government.

The following points may be noted to understand in brief how and by whom the 1% TDS will be deducted.

In cases,

• where the VDA transaction is conducted P2P, without the involvement or exchange of a broker, the liability to pay the tax lies on the seller. No TDS will be liable on the buyer’s side where P2P exchange is through INR. The buyer will be required to release the consideration in kind if the seller produces documentation of payment of tax for the transfer of VDA in return for kind.
• where the VDA is transferred through a broker or an exchange, the tax deduction will be done by the exchange, which is crediting or paying the seller.
• where a broker is not the seller, the liability of tax deduction falls on both the broker and the exchange, assuming no prior written agreement exists between the parties.
• Where crypto to crypto transactions are made, both the buyer and seller must pay tax on the transfer of VDA and produce the documentation to each other before VDAs may be exchanged.
• where the exchange primarily owns the VDAs being sold, it can enter into a contractual agreement with the buyer or broker that the exchange will pay the tax on all such transactions.

TDS will be assessed at 1% of the total transaction amount and it will be deducted while selling crypto and obtaining INR in return in your wallet and would not be deducted while withdrawing INR from the wallet into your bank account.

Certain categories of taxpayers have been granted exemption on 1% TDS rule by the government for transactions of up to Rs 50,000 ($640) in a financial year. The provision applies to individuals and HUFs who are required to have their accounts audited. No TDS will be calculated on sum credited or paid before 1st of July 2022. Crypto exchanges are required to maintain the trail of transactions for every TDS deduction and furnish a quarterly statement on the same. All such transactions must be reported on their tax returns.

The TDS deduction would apply to all virtual digital assets (VDA), including both cryptocurrencies and non-fungible tokens (NFTs). All TDS transactions are to be disclosed by the exchange platforms as a TDS statement, together with the challan number, on Form 26Q provided by the Income Tax Department.

With the new 1% TDS provision, the compliance burden for exchanges as well as taxpayers is bound to go up. However, it is expected that nothing can really dispirit Indian traders and the tally of 100 million people owning cryptocurrency in India is projected to rise further.

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