The income tax department said both the buyer and seller will have to withhold taxes for transactions involving the exchange of one virtual asset for another. The Central Board of Direct Taxes said the buyer will have to deduct tax in a peer-to- peer transaction of virtual digital assets VDA, because the buyer ie person paying the consideration will have to go through an Exchange transaction according to section 194 S of the Act. The person responsible for paying the consideration must make sure that the tax required to be deducted has been paid in respect of the consideration in order to be able to release the consideration, under section 194 S of the Act. The CBDT said that both the persons are a buyer and a seller in a situation where VDA A is being exchanged with another VDA B. One is the buyer for A and seller for B and the buyer for B and seller for A. Both need to pay tax with respect to the transfer of VDA and show the evidence to other so that VDAs can be exchanged. The CBDT said that this would be required to be reported by both of them in the TDS statement, along with the challan number. Nangia Andersen LLP Partner Sandeep Jhunjhunwala said that the CBDT has given the buyer the leeway to make sure that the seller has discharged appropriate taxes before releasing the consideration because the consideration is partly in kind and the cash component is not sufficient to discharge the TDS liability. This is a relief for buyers who would have to bear the TDS cost without any recourse for recovery from the seller, and circumvents the seller from taking credit of taxes disposed of by the buyer, Jhunjhunwala said. AKM Global Tax Partner Amit Maheshwari said this will increase the compliance burden for both buyers and sellers in transactions happening outside exchanges, unlike in the case of an exchange where the exchange would take care of compliances, so the buyer will have to do the compliances. The buyer and seller will not have to apply for TAN for depositing the TDS under 194 S, but other implications of section 206 AA for non-furnishing of PAN to each other would still be required to comply with. He said that once withholding is done under 194 S, there is no need for further withholding under any other section. AMRG Associates Director Corporate International Tax Om Rajpurohit said the strict TDS compliance requirement for trading virtual assets is understandable, given that the government does not want to promote such trading while also reiterating its firm stance against misuse of unaccounted money. Last week, the CBDT clarified that the burden of deducting 1 per cent TDS would primarily be on the exchanges in the case of VDA transactions happening through exchanges. The TDS provisions on cryptocurrencies and VDA provisions, announced in the 2022 -- 23 Budget, will be effective from July 1. The 2022 -- 23 budget brought clarity to the levy of income tax on cryptocurrencies. A 30 per cent I-T plus cess and surcharges will be levied on such transactions from horse races or other speculative transactions from April 1, as well as in the same way as it treats winnings from horse races or other speculative transactions. A 1 per cent TDS on payments over 10,000 in virtual currency has also been introduced, which will start on July 1. The threshold for TDS would be Rs 50,000 a year for specified persons, which include individuals HUFs who are required to have their accounts audited under the I-T Act.