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Direct Tax Vista Your weekly Direct Tax recap Edn. 12 – 28th June 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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1. Section 194S : TDS on VDAs – Clarifications
The Finance Act 2022 inserted a new section 194S in the Income-tax Act, 1961 to provide for deduction of tax by any person who is responsible for paying consideration to a resident person in respect of the transfer of virtual digital assets (VDAs). The liability to deduct under section 194S is of a person who is responsible for paying the consideration for the transfer of VDA (i.e., the payer) and not of the person who is buying the VDA (i.e., the buyer). Thus, the payer and buyer of VDA may be different persons. This generally happens when the VDAs are transferred through an Exchange or Broker. Where VDAs are transferred through an Exchange, the buyer would be crediting or making payment to the Exchange (either directly or through a broker). The Exchange then would be required to credit or make payment to the owner of VDA (either directly or through a broker). Since there can be multiple players involved in a transaction taking place through an Exchange, there is a possibility of tax deduction requirement under section 194S at multiple stages, and, accordingly, there would be a compliance burden on multiple parties involved in such transaction. To remove the difficulties that may arise while deducting tax at source under section 194S, where VDAs are transferred on or through an exchange, the CBDT has issued certain guidelines in the exercise of the power conferred by sub-section (6) of section 194S, which shall be binding on the income-tax authorities as well as the person responsible for paying the consideration for transfer of VDA. The following are the important clarifications as per the Circular –
1. Is VDA ‘goods’ – No Comments. As per information, The Central Economic Intelligence Bureau (CEIB) has proposed categorising cryptocurrencies as intangible assets and applying GST on all the crypto transactions. Since the government has not yet defined its taxability and the proposal is under discussion, a general rate of 18% may likely become applicable going forward.
2. 194S prevails over 194Q
3. TDS u/s 194S on “Net excluding GST”
4. No TDS u/s 194S on “service charges on VDA”
5. Transfer of VDA taking place on or through an Exchange and seller/broker owns the VDA –
a. Exchange should deduct TDS incase Seller is the owner himself
b. Exchange should deduct TDS incase broker is the owner of the VDA
c. Incase broker is intermediary, then exchange/broker should deduct TDS as per their agreement
d. Exchange has to report all these transactions in Form 26QF quarterly
6. Transfer of VDA taking place on or through an Exchange and Exchange owns the VDA –
a. Primary responsibility of the Buyer to deduct TDS
b. Exchange/broker may deduct TDS as per their agreement
c. Exchange has to report all these transactions in Form 26QF quarterly & Pay the tax before the return is filed
7. Incase payment is in kind/ in exchange of another VDA –
a. TDS is by the ‘person responsible for paying the consideration’
b. Payment has to be made only after ‘proof pf payment’ of TDS is received
8. “VDA A” for “VDA B” between peers
a. TDS is by the ‘person responsible for paying the consideration’
b. Buyer of VDA A has to deduct TDS before transferring VDA B & Vice-versa
c. Challan details and Form 26DF needs to be filled
d. Specified persons need to fill Form 26QE
9. “VDA A” for “VDA B” through exchange -
a. Exchange may deduct TDS as per their agreement
b. Exchange to deduct TDS for ‘both legs’ of the transaction
c. Exchange has to report all these transactions in Form 26Q quarterly & Pay the tax before the return is filed
d. No liability of TDS on buyer/seller
e. Incase TDS is deducted in kind (Eg. 1% Monero for 1% Deso) -
i. Trail to be maintained for ‘non-primary VDA’ TDS
ii. Convert to ‘primary VDA’ immediately – which can be converted to INR
iii. Time stamps of timing of orders to be maintained to ensure conversion of VDAs to be done immediately
f. All TDS for 1 day (0:00 to 23:59)
g. The accumulated balance of primary VDAs at 00.00 hours will be converted into INR based on the market rate existing at that time
h. Customer will be issued a contract note over email which will include the amount of tax withheld in kind under section 194S and the amount of INR realized from such tax withheld.
i. there would not be any further TDS for converting the tax withheld in kind in the form of VDA into INR or from one VDA to another VDA and then into INR
10. Payment for VDA by ‘payment gateways’. Whose liability for TDS?
a. Liability for TDS is on the buyer
b. Undertaking to be taken from the buyer that TDS amount has been deducted and paid
11. The threshold would be applicable from 1st July 2022 for credits done or payments made
2. “NIL” TDS u/s 195 on Secondment of Employees
After The Apex Court’s Judgement in the case of Northern Operating Systems that Service Tax will be chargeable of ‘secondment of services’ incase there is no employer/employee agreement between the deputee and seconded person, now it’s the question of whether TDS u/s 195 would be deducted incase of fee for such secondment is paid by the deputee to the deputer. In terms of Article 12 of DTAA for the purpose of construing 'FTS', it is necessary that the rendering of technical or consultancy services must be “made available”. Incase ‘Secondment of services’ does not reveal the satisfaction of the requirement of 'make available' which is an essential condition for being a 'FTS', the mere fact that the employees seconded have "the requisite experience, skill or training capable of completing the services contemplated in Secondment" by itself is insufficient to treat it as 'FTS'. Incase the Secondment agreement does not support 'make available', further enquiry regarding 'make available' may not be called for. The 'make available' requirement that is mandated under Article 12(4) grants benefit to the assessee and accordingly, the question of falling back on the provisions of Section 9 of the I.T. Act does not arise. Further, NIL TDS Determination under Section 195(2) and grant of certificate for such a NIL deduction u/s 197 is completely eligible, if the assessee were of the view that the payment being made was not chargeable under the provisions of the I.T. Act and the recourse cannot be faulted.
3. Reopening: If there is conscious application of mind on an issue during assessment there cannot be reassessment only because of an error in such opinion
Incase during a scrutiny assessment, an assessee is asked to submit certain details/information relating to the relevant assessment year and it furnishes different details as required and thereafter the assessment order was issued without any additions or rejection, there shall be a presumption that such an order is passed on application of mind attached to it and it must be deemed that the AO has opined in favour of the assessee. If there is conscious application of mind on an issue during assessment there cannot be reassessment only because of an error in such opinion. Thereafter, a notice issued under Section 148 read with Section 147 of the Act cannot be sustained and would be quashed on the ground of lack of jurisdiction.
4. India Habitat Centre – Delhi, continues as a “Charitable Institution”
Even after years of being assessed as a Charitable Organisation, due to an amendment in Section 2(15), The Income Tax Authorities allege that incase there is any commercial activities carried on, the Trusts would loose their exemption u/s 11. The same was the case with India Habitat Centre. In the said case, like in so many other similar cases, it was held that merely charging for goods and services is not the same as commercial activities. It is hardly possible for a charitable trust to work with no source of income. So, the makers of the trust, dedicated a portion of the income of the business for being used for charitable purpose. As long as the use of that money is charitable, then the exemption has to be granted.
The ultimate test that has to be applied is whether or not the trust’s predominant motive is one of earning profit or is engaged in charitable activities. Incase all the surpluses generated by the trust are used to maintain and improve the infrastructure or to undertake various charitable activities in accordance with its aims and objectives, then the assessee should continue to be treated as a charitable organization and allowed benefit of exemption under section 11.
5. Submission of STT Forms by Stock Exchanges, Mutual Funds, etc by 30th June 2022
As per Section 101 of the Securities Transaction Tax, every recognized stock exchange or the prescribed person in the case of every Mutual Fund [or insurance company] [or the lead merchant banker in the case of an initial public offer] [or an initial offer] shall, within the prescribed time after the end of each financial year, prepare and deliver or cause to be delivered a return to the Assessing Officer or to any other authority or agency authorized by the Board. The Central Board of Direct Taxes (CBDT) has notified Format, Procedure, and Guidelines for submission of Form No. 1, Form No. 2 and Form No. 2A for Securities Transaction Tax (STT) electronically. The revised Form Nos 1, 2, and 2A are required to be signed, verified and furnished by such class of the person responsible as defined in the Securities Transaction Rules, 2004. Earlier, the Board vide notification No. 9/2022, dated 18-01-2022, has amended the Securities Transaction Tax (STT) Rules, 2004 wherein the sub-rule (2) to Rule 7 was substituted to mandate the electronic filing of STT returns. All the Reporting Institutions (class of person responsible) as defined in the Securities Transaction Rules 2004 and further modified by Notification dated 18-01-2022 are required to prepare the data file in the prescribed format from their internal system. Reporting Institutions are required to submit the data files using SFTP Server using the login credential.
STT returns shall be furnished on or before 30th June, immediately following the Financial Year in which the transaction has been recorded.
(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)