Section 194S of The Income Tax Act: TDS on Virtual Digital Assets

In response to the rapid growth of the digital asset market, including cryptocurrencies and non-fungible tokens (NFTs), the Indian government introduced Section 194S of the Income Tax Act through the Finance Act of 2022. This new section mandates a 1% Tax Deducted at Source (TDS) on payments made for the transfer of Virtual Digital Assets (VDAs). The primary goal of this provision is to ensure tax compliance, transparency, and regulation within the digital asset ecosystem, reflecting the government’s recognition of the significant economic activities occurring in this space.

What Is a Virtual Digital Asset (VDA)?

A Virtual Digital Asset (VDA) encompasses any information, code, number, or token generated through cryptographic means or other digital representations, excluding Indian or foreign currency. This definition, formally introduced as provision (47A) in Section 2 of the Income Tax Act, 1961, was established under the Finance Act of 2022 to cover a broad spectrum of digital assets, including but not limited to cryptocurrencies like Bitcoin and Ethereum, as well as NFTs. These assets have gained substantial popularity and value, necessitating a clear tax framework.

Also Read More About Tax on Dividend

Taxation on VDAs

Section 115BBH of the Income Tax Act sets a flat tax rate of 30% on income generated from the sale of cryptocurrencies, virtual currencies, and NFTs, in addition to any applicable cess and surcharges. This taxation rate, effective from April 1, 2022, aims to create a uniform tax structure for digital assets, ensuring that gains from such assets are adequately taxed and contributing to the formal economy.

Who Is Responsible for Deducting TDS Under Section 194S?

The responsibility for deducting TDS under Section 194S falls on the person making the payment for the transfer of a VDA. The requirement to deduct TDS arises when the payment exceeds ₹50,000 during a financial year for specified persons or ₹10,000 for others. A “specified person” includes:

• Individuals or Hindu Undivided Families (HUFs) without income under “profits and gains of business and profession.”
• Individuals or HUFs with business income up to ₹1 crore.
• Individuals or HUFs with professional receipts up to ₹50 lakh.

This categorisation ensures that smaller taxpayers or those with limited income are not unduly burdened by the TDS requirements.

Provisions of Section 194S

Section 194S stipulates that TDS at the rate of 1% must be deducted from any payment made to a resident for the transfer of a VDA. The deduction should be executed either at the time of payment or when the resident’s bank account is credited, whichever occurs first. This provision ensures that tax is collected at the point of transaction, thereby minimising the risk of tax evasion.

The deducted TDS must be reported to the government using Form 26Q or Form 26QE for specified persons. This reporting mechanism is crucial for maintaining accurate records and ensuring that the TDS collected is appropriately documented and remitted to the government.

Rate of TDS Under Section 194S

The TDS rate under Section 194S of Income Tax Act is fixed at 1%. However, if the payee fails to provide their Permanent Account Number (PAN), the tax must be withheld at a higher rate of 20%. This higher rate acts as a deterrent against non-compliance with PAN requirements and encourages taxpayers to furnish their PAN for all financial transactions.

Calculation of TDS Under Section 194S

To assist taxpayers in calculating the TDS amount under Section 194S, a TDS calculator can be used. This tool helps in determining the exact amount to be deducted, ensuring compliance with the tax provisions.

Transfer Through Exchange (Not Owning VDA)

When a VDA transfer occurs via an exchange that does not own the VDA, the exchange is responsible for deducting 194S TDS at 1% and remitting the balance to the seller. If multiple parties are involved, the buyer or their broker may also be responsible for the TDS deduction. In such cases, the exchange must submit a quarterly report in Form No. 26QF to ensure transparency and accountability.

Transfer in Cash Through Exchange (Not Owning VDA)

For cash transactions conducted through an exchange that does not own the VDA, the exchange is still required to deduct TDS at 1% and pay the balance to the seller. If payment is made through a broker, both the broker and the exchange may be responsible for the TDS deduction. Alternatively, the exchange and broker can mutually agree on who will handle the TDS deduction and reporting.

Transfer of VDA in Kind via Broker, Barter for Another One

For transactions involving payments in kind, partly in kind, or barter for another VDA, the exchange may deduct tax on both legs of the transaction based on their agreement. If the transaction is not conducted through an exchange, the payer must deduct and deposit the TDS. This provision ensures that all types of VDA transactions are covered under the TDS framework, regardless of the form of payment.

When Is TDS Under Section 194S Deducted and Deposited?

TDS under Sec 194S must be deducted at the time of payment or when the resident’s bank account is credited, whichever comes first. The deducted TDS must be reported to the government using Form 26Q or Form 26QE for specified persons. This process ensures timely and accurate reporting of TDS deductions, preventing delays or discrepancies in tax collection.

Consequences of Not Deducting TDS Under Section 194S

Failure to deduct TDS as required under Section 194S of Income Tax Act can lead to penalties under Section 271C of the Income Tax Act. The penalty is equal to the tax amount not deducted. Additionally, prosecution under Section 276B may apply if taxes are not paid to the credit of the Central Government. These stringent consequences emphasise the importance of compliance with TDS provisions and act as a deterrent against non-compliance.

Conclusion

Section 194S of the Income Tax Act plays a crucial role in ensuring that income from the transfer of Virtual Digital Assets is subject to TDS. This provision, detailed in 194S of the Income Tax Act, promotes tax compliance, transparency, and regulation within the digital asset market. By adhering to the requirements of sec 194S of the Income Tax Act, taxpayers can avoid penalties and legal issues, fostering a transparent and accountable digital asset market. Understanding TDS 194S and following the guidelines of TDS section 194S safeguards against tax evasion and ensures that gains from digital assets contribute to the formal economy.

FAQs