Starting on July 1, 2022, the Indian income-tax law will mandate a person responsible for paying consideration for the transfer of cryptocurrency i.e. virtual digital asset (“VDA”) to withhold tax (“TDS”) at the rate of 1% at the time of payment or credit, whichever is earlier.
The frequently asked questions (“FAQs”) below should be read in addition to Paxful’s Terms of Service. These FAQs provide a summary of only the withholding tax provisions introduced under the Indian tax law and do not provide any other tax implications which may arise under Indian laws. Please note that these FAQs are not legal or tax advice and users should consult their own legal/tax consultants to determine tax implications.
1. What is TDS?
TDS is a method of tax collection at the source of the income i.e. before paying income to the payee. Tax is deducted by the payer and is remitted to the tax authorities by the payer on behalf of the payee.
2. When is TDS required?
TDS is required when an Indian seller is making a transfer (which includes the sale, exchange, etc.) of a VDA. Note that there is no TDS obligation when buying VDA from a non-Indian seller.
3. Who is required to do TDS?
The person responsible for paying consideration i.e. the buyer (irrespective of whether a resident or non-resident of India) to the Indian seller for the purchase of the VDA is required to do TDS.
4. What are the tax rates and tax base for doing TDS?
TDS is required to be done at the rate of 1% on the entire amount of the transfer of VDA.
Tax is required to be deducted at the rate of 5% when the Indian seller
(i) has not filed their income-tax return in the preceding year where the timeline to furnish such return has expired and
(ii) the aggregate TDS or tax collected at source in case of such seller is 50,000 INR or more in the relevant year. Buyers can check if the seller falls into these categories here. Please note that the higher TDS rate is not applicable to a buyer who qualifies as a ‘specified person’ (more on this below).
If the Indian seller does not provide its permanent account number to the buyer, the TDS rate will increase to 20%.
5. How is tax deducted when VDA is exchanged for another VDA?
If VDA is exchanged for another VDA (crypto-to-crypto pair), both the buyer and the seller are required to pay tax and provide evidence to each other before releasing the VDA.
6. How is tax deducted when VDA consideration is in kind?
In cases where the transfer of VDA is being made for consideration in kind, the buyer of the VDA will release the consideration in kind after the seller provides the proof of payment of 1% TDS (e.g. challan details, etc.).
7. How is 1% TDS calculated?
Case 1: Transfer of VDA for cash consideration
User A wants to sell 10 VDAs to user B. The price of each VDA is 50 INR.
The gross amount of this trade is 500 INR (10*50).
User B is required to do TDS on the gross amount of trade (i.e. 1% of 500 INR = 5 INR).
The actual amount received by user A is 495 INR.
Case 2: Transfer of VDA in exchange for another VDA
User A wants to sell 10 BTC to user B in exchange for 5 ETH.
Both users are required to do 1% TDS on the gross consideration and will need to provide proof (i.e. user A will withhold and deposit INR equivalent to 1% of 10 BTC and user B will withhold and deposit INR equivalent to 1% of 5 ETH).
8. Are there any exemptions from TDS?
Yes, TDS is not required if you are a ‘specified person’ and the aggregate transaction value of consideration does not exceed 50,000 INR during a financial year. You are a specified person if you are:
- An individual or Hindu undivided family (“HUF”) who does not have any income from a business or profession;
- An individual or HUF who has income from a business or profession but your gross sales/receipts/turnover from such business or profession do not exceed more than 1 INR crore or 50 INR lakhs.
If you are not a specified person, TDS is not required to be deducted where the aggregate transaction value of consideration does not exceed 10,000 INR during a financial year.
9. What are the obligations of the user deducting TDS?
The obligation of the user deducting TDS depends on if the user is a specified person or not. Generally, the user deducting TDS is required to deposit the tax within the given timelines and provide evidence of the deduction to the person on whose behalf the tax has been deducted (i.e. the seller).
10. Can the seller take credit for the TDS?
Yes, the seller can obtain credit for the TDS while filing income-tax returns in India.
11. Are there any consequences if the buyer (i) does not deduct tax or (ii) if deducted and does not deposit it to the account of the government?
Yes, the Indian tax law imposes penalties in case the deductor (i.e. the buyer) (i) does not appropriately deduct or (ii) deducts but delays or fails to deposit the tax withheld with the government.
12. Where can I get more information about TDS provisions?
You can refer to the relevant provisions under the Income-tax Act, 1961 here. The Indian government has also issued clarifications on TDS provisions here.
Disclaimer: The user is solely responsible for the determination of tax implications on transactions undertaken on Paxful. Paxful is in no way responsible for determining whether there are any tax implications on transactions undertaken by the users nor it is responsible for collecting or withholding or depositing any taxes on behalf of the users.
