In line with the existing TDS section 194IA requiring deduction of tax at source @ 1% on purchase of any immovable property exceeding rupees fifty lakhs in a year, the Finance Bill 2022, has proposed a new section 194S applicable w.e.f. 1.7.2022, mandating deduction of tax at source @ 1% on the payment of purchase consideration to a resident person, on transfer of a virtual digital asset, as defined in another new section 2(47A).
Further, two threshold limits, for the amount of purchase consideration, has been prescribed, to be liable for deduction of TDS under this new section 194S.
For ‘specified person’, i.e. an individual or HUF, whose total sales or gross receipts does not exceed rupees one crore, in case of business, or rupees fifty lakhs in case of profession, during the immediately preceding financial year, or, an individual or HUF, who does not have any income under the head business or profession, TDS under this new section 194S is required to be deducted only, if the amount of purchase consideration for purchase of virtual digital asset, exceeds rupees fifty thousand, during the financial year.
In case of a person other than such specified person, including firms, LLPs and companies, TDS under this new section 194S is required to be deducted only, if the amount of purchase consideration for purchase of virtual digital asset, exceeds rupees ten thousand, during the financial year.
It is also noteworthy to mention here that the Finance Bill 2022 has also proposed a new section 115BBH applicable w.e.f. 1.4.2022, mandating the taxability of the income arising from the transfer of virtual digital assets at a flat rate of 30% plus applicable surcharge and cess, with reduction only in respect of its cost of acquisition, and excluding all other reductions including adjustment of brought forward losses.
Issues requiring more Clarity from the Legislature
In respect of new section 194S:-
a. The sale and purchase of cryptocurrencies usually takes place at the crypto exchanges, just like a stock exchange, where the identity of the buyer and seller is not revealed. So, in such cases, how it will be possible for the buyer to deduct TDS in the name of the seller of such virtual digital asset? In such cases, whether the crypto exchanges will be required to deduct the TDS?
b. The current definition of ‘Virtual Digital Asset’ in the newly proposed section 2(47A) in the Income Tax Act, excludes ‘foreign currency’ from its ambit. The most commonly used cryptocurrency, ‘Bitcoin’ has been recognized as ‘legal tender’ in the country El Salvador, w.e.f. 1.9.2021 (as per the Wikipedia), and as such, it is amenable to be considered as a ‘foreign currency’. So, the currently proposed definition of ‘virtual digital asset’ in section 2(47A), will exclude ‘Bitcoin’ from its ambit, which will defeat the very purpose and objective of bringing about this amendment.
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