India issues guidelines on crypto withholding tax
In order to tape the profits from growing cryptos industry in India, the government introduced an withholding tax of 1% for the transfer of cryptos in Finance Act 2022 effective on 1 July 2022. Tax Authority of India issued the guidance on the withholding tax in Circular No. 13 of 2022.
1. Exempted Persons
The persons are exempted from withholding if it meets one of the following criteria:
- Below an annual aggregate value of INR 50,000 if payable by a specified person, which is an individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession”, and whose total sales/gross receipts/turnover from business carried on by him does not exceed INR 10 million or in case of profession exercised by him does not exceed INR 5 million. This threshold is to be seen in the financial year immediately preceding the financial year in which the cryptos is transferred.
- Below an aggregate value of INR 10,000 if payable by a person other than a specified person.
- The circular clarifies the application of the threshold above as the withholding tax is effective from 1 July 2022 while the threshold is based on the financial year starting on 1 April 2022.
2. Withholding Persons
- In a peer-to-peer transaction, the buyer paying the consideration is required to withhold the tax.
- In a transaction through crypto exchange (the exchange is not seller), the exchange withholds the tax before paying the seller.
- In a transaction with crypto exchange (the exchange is seller), the buyer is obligated to withhold the tax. As the buyer may not know whether the exchange is seller or not, the exchange is obligated to furnish a quarterly statement and income tax return for the buyer.
3. Exchange In Kind
- When one crypto is being exchanged for another crypto, both persons are considered both a buyer (crypto exchanged from) and a seller (crypto exchanged for) and they are responsible for withholding the tax.
- An alternative mechanism allows the Exchange to withhold the tax for both side of the transactions.
4. Double Taxation
- Once the withholding tax for crypto is paid, the buyer or the exchange would not be required to be deducted under exchange of goods (section 194Q).
5. Gross or Net
- The 1% is changed on net consideration after GST and exchange commissions.