CBDT provides much awaited guidelines in relation to TDS on payments for Virtual Digital Assets

Sr No.

Particulars

CBDT Guidelines and Khaitan Comments

1.                 

In case transfer of VDA takes place on or through an Exchange[1] and payment is made by the purchaser to the Exchange (directly or through broker) and then from the Exchange it goes to seller directly or through the broker, the issue which arises is who is required to deduct tax in relation to such transfer since there is a possibility of TDS being applicable at multiple stages on the same transfer

The CBDT has clarified as follows:

Comment: These clarifications were much awaited and are likely to resolve the practical difficulty in determining which stakeholder is required to comply with the 1% TDS obligation on VDA transfers undertaken on the Exchanges. The requirement for a written agreement and reporting obligation by the Exchange are noteworthy to avoid any adverse consequences for the stakeholders.

2.                 

Applicability of 1% TDS obligation where consideration is in kind or in barter for another VDA or partly in kind and partly in cash

The CBDT has clarified that if such transaction is not undertaken on an Exchange, the buyer (in a barter, both the parties would be buyers) is required to ensure that TDS has been paid in respect of such transaction before release of consideration.

Further, where such transaction is through an Exchange, the Exchange is permitted to deduct tax from administrative convenience standpoint, subject to written contractual agreement with the buyers/sellers and certain other compliances. A detailed procedural mechanism has also been provided in the CBDT Guidelines to compute the quantum of TDS amount in case of barter of one VDA for another VDA.

Comment: Implementation of this 1% TDS obligation for transfer of VDAs for non-monetary consideration / barter for another VDA was difficult. The aforesaid clarification by CBDT is expected to ease the difficulty to some extent for the stakeholders. Having said that, the requirement of written contractual agreement and practical feasibility of the detailed procedural mechanism laid out for computing this TDS amount are noteworthy and needs to be evaluated in greater detail.

3.                 

Interplay of Section 194Q (TDS on transfer of ‘goods’) with Section 194S

The CBDT has clarified that without evaluating whether VDA qualifies as ‘goods’ or not,in case tax is deducted on transfer of VDAs under Section 194S of the IT Act, no tax is required to be deducted again under Section 194Q of the IT Act.

Comment: The issue of whether VDA qualifies as ‘goods’ or not has been a subject matter of divergent interpretations. While the clarification that once a transaction is subject to TDS under Section 194S, it will not trigger TDS again under Section 194Q brings some clarity on the taxability of VDAs, some clarity on the characterization aspect of VDAs (i.e. whether it falls within the ambit of goods or not) would have been even better. Further, clarity on interplay of this 1% TDS obligation with other TDS provisions should also be provided.

4.                 

Obligation to deduct tax where payment gateways are involved i.e. the obligation is on the buyer or the payment gateway

In cases where the payment is made through payment gateways, it has been clarified that the payment gateway shall not be required to deduct tax under Section 194S, if tax has been deducted by the person required to make such deduction (buyer).

Further, it has been mentioned that to facilitate proper implementation, the digital platform (payment gateway) may take an undertaking from the buyer regarding deduction of tax.

Comment: This provides much needed clarity to avoid the issue relating to double deduction of tax on the same transaction. The aspect of obtaining an undertaking is noteworthy for the payment gateway.