The Income Tax Act, 1961 governs the tax system in India. As digital currencies and virtual digital assets (VDAs) became popular, the government had to find a way to tax these transactions. To address this, Section 194S was introduced by the Finance Act 2022. It focuses on the deduction of tax at source (TDS) for payments made when transferring virtual digital assets, like cryptocurrencies and NFTs. This article will explain what Section 194S is, how it works, and why it matters.
What is Section 194S of Income Tax Act?
Section 194S is a provision in the Income Tax Act that deals with the taxation of virtual digital assets (VDAs). It says that 1% TDS must be taken out of any payment made for a VDA move. This needs to be done either when the payment is made or when the money is added to the account of the receiver. This rule's purpose is to make sure that all VDA transactions are recorded and taxed which will make the market more open.
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Who Has to Deduct TDS?
To pay the VDA, the person who is making the payment must take out the TDS. This could be a person, a business or even an exchange that handles the deal. When must the TDS be deducted
The amount is credited to the recipient’s account.
The payment is made by any method like cash, bank transfer, or cheque.
For example, if someone buys Bitcoin worth ₹1,00,000, 1% of that amount (₹1,000) must be deducted as TDS, and the buyer will pay ₹99,000 to the seller.
What Happens If Payment Is Not In Cash?
Section 194S covers situations where the payment for a VDA transfer is not in cash. If the payment is wholly in kind (like exchanging one VDA for another), or if it is partly in cash and partly in kind, the TDS must still be deducted. In such cases, the person making the payment must ensure that the tax is deducted before the transfer takes place. This ensures that tax is paid even if the payment is not in cash.
Exemptions in Section 194S of Income Tax Act
In order to make it simpler for smaller transactions, Section 194S requires TDS but also offers some exemptions. Small businesses and people who only do a few VDA transactions will pay less in taxes thanks to these exemptions. These exemptions are mainly based on the amount of the transaction:
Exemption for Specified Persons:
A specified person is someone like an individual or Hindu Undivided Family (HUF) whose business turnover is below ₹1 crore or whose professional receipts are below ₹50 lakh in the last financial year.
If a specified person is involved in a VDA transaction, no TDS is required if the total payment does not exceed ₹50,000 during the financial year.
Exemption for Non-Specified Persons:
If the total consideration for VDA transfers does not exceed ₹10,000 during the financial year, no TDS is needed. This applies to persons who are not specified persons (i.e., anyone who doesn’t fall under the criteria above).
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How Does Section 194S of Income Tax Act Apply to Cryptocurrency and NFTs?
The rise of cryptocurrencies like Bitcoin and Ethereum, as well as Non-Fungible Tokens (NFTs), has changed the way people trade digital assets. With this rise, it became important for the government to regulate these assets. Section 194S helps ensure that all cryptocurrency transactions are taxed properly.
For example, if a person buys Bitcoin through an exchange, the exchange is responsible for deducting the TDS. This also applies to NFT sales, where a digital asset (like an artwork or a collectible) is sold and transferred to a buyer.
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Section 194S vs Section 194-O
Section 194-O also deals with TDS, but it applies to e-commerce platforms. It covers payments made through online platforms. If both Section 194S and Section 194-O apply to a single transaction, Section 194S takes precedence. This means that the 1% TDS under Section 194S will be deducted even if Section 194-O is also relevant to the transaction.
For example, if someone buys a VDA via an e-commerce platform, the platform must deduct TDS under Section 194S, as it applies to the VDA transaction.
What Happens If TDS Is Not Deducted?
If the person responsible for deducting TDS fails to do so, they could face penalties. Under Section 271H and Section 234E, penalties can be imposed for not deducting or paying TDS on time. Additionally, if the TDS return is filed late, the person may be charged a fee of ₹200 per day under Section 234E. It is important to comply with Section 194S to avoid these penalties.
The Role of the Central Board of Direct Taxes (CBDT)
Sometimes, there may be issues in applying the rules of Section 194S. In such cases, the Central Board of Direct Taxes (CBDT) can issue guidelines to resolve these difficulties. These guidelines will be binding on both the tax authorities and the person making the VDA transfer payment. The CBDT will also lay these guidelines before Parliament to ensure transparency.
Why is Section 194S of Income Tax Act Important?
Section 194S is crucial because it ensures that the taxation of virtual digital assets is done properly. This part of the law makes sure that transactions are taxed and that the government gets its fair share of taxes as the market for cryptocurrencies and NFTs grows. It also stops people from not paying their taxes, which makes the market for digital assets more open and controlled.
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It has been agreed upon by the government that virtual digital assets should be brought into the tax system. Section 194S helps make sure that VDA transactions, no matter how big or small are taxed correctly and do not put too much of a load on traders.
In a nutshell,
Section 194S of Income Tax Act, 1961, is an important provision that addresses the growing market for virtual digital assets. This section makes sure that these transactions are correctly taxed by requiring TDS to be deducted on the transfer of VDAs. This part of the law helps control the cryptocurrency and NFT market, which was hard to keep an eye on before. There are exemptions for smaller transactions and it does put some compliance obligations on people and businesses. As the market for digital assets continues to grow, Section 194S will play a crucial role in ensuring that these transactions are taxed fairly and transparently.
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FAQs on Section 194S of Income Tax Act
Q1. What is Section 194S of Income Tax Act?
Section 194S mandates deduction of 1% TDS on payments made for the transfer of virtual digital assets (VDAs) such as cryptocurrency and NFTs.
Q2. Who is required to deduct TDS under Section 194S?
The payer of the payment for the transfer of the VDA has to deduct TDS at the time of payment or credit, whichever occurs first.
Q3. Are there any exemptions in Section 194S of Income Tax Act?
Yes, no TDS is needed if the aggregate consideration for VDA transfers is less than ₹50,000 (for the specified persons) or ₹10,000 (for others) in a year.
Q4. Is Section 194S applicable on cryptocurrency transactions?
Yes, Section 194S is applicable on transactions made through cryptocurrencies, so that taxation is done on such transactions appropriately.
Q5. What if TDS is not deducted?
If TDS is not deducted, Section 271H and Section 234E penalties could be attracted, including late filing fees of TDS returns.
Q6. Does Section 194S of Income Tax Act cover e-commerce platforms?
Yes, if a VDA is being sold through an e-commerce platform, Section 194S TDS is applicable, even if Section 194-O is also applicable for the transaction.
Q7. What if the payment is in kind or partially in kind?
Even if the payment is in kind (or partially in kind), the payer has to pay the required tax before the transfer.
