Taxation of Digital Transactions: formula sheet

Key formulas

SEP limb 1: payments test

Aggregate payments from transactions in India in the year > prescribed amount (₹2 crore as notified under the 1961 Act, Notification 41/2021)

Covers goods, services, property and download of data or software. The test is on payments, not on profit. Check the figure against the current notification.

SEP limb 2: users test

Systematic and continuous soliciting of business activities, or interaction with users in India through digital means, with users > prescribed number (3 lakh as notified under the 1961 Act, Notification 41/2021)

Either limb is enough. The limbs are alternatives, not cumulative. Check the number against the current notification.

Extent of taxable income

Taxable in India = income attributable to the Indian transactions or user activities

Only attributable income is deemed to accrue in India, not global profit.

Physical presence not needed

SEP exists whether or not the non-resident has a place of business, agreement in India or services rendered in India

Use this line to answer arguments that the foreign firm has no office in India.

Treaty choice

For a treaty-country non-resident: governed by the provisions of the Act or the treaty, whichever is more beneficial, subject to the conditions for claiming treaty benefit

This is not an automatic arithmetic minimum of two tax figures. If the treaty gives no PE or business-profits taxing right, treaty relief can apply, but only if the treaty conditions are met and documents such as a tax residency certificate are held.

Income from transfer of VDA

Income = Consideration on transfer − Cost of acquisition

No other expense, allowance or deduction is permitted against this income. Brokerage and exchange fees are not allowed.

Tax rate

Tax = 30% × VDA income (plus surcharge and cess as applicable)

Flat rate irrespective of holding period, nature of holding (capital or business) and the person's slab.

Loss treatment

Loss from transfer of VDA: no set-off against any other income, no carry forward

This covers other heads and gains on other VDAs. A loss gives no tax benefit.

TDS on transfer to a resident

TDS = 1% × Consideration paid

Applies once the payer's aggregate consideration in the year crosses the threshold. The threshold is ₹50,000 if the payer is a specified person (an individual or HUF with no business income, or with business turnover or receipts within the audit limits) and ₹10,000 for all other payers. It is tested on the payer, not the seller. Where the transfer is through an exchange or broker, that intermediary may be the one to deduct.

Net amount received by seller

Net receipt = Consideration − TDS at 1%

The seller claims TDS as credit against final tax. The TDS is not the final tax.

Who deducts, on what

E-commerce operator deducts tax on gross amount of sales or services of a resident e-commerce participant facilitated through its platform

Applies whether the buyer pays through the platform or directly to the participant. The base is gross sales, not commission.

Tax to deduct

TDS = Gross amount × 0.1% (PAN or Aadhaar furnished); TDS = Gross amount × 5% (PAN or Aadhaar not furnished, under the no-PAN higher-rate rule; 5% is the specific rate for this provision)

The rate is 0.1% from 1 October 2024 (earlier 1%). If PAN or Aadhaar is not furnished, the no-PAN higher-rate rule (section 206AA of the 1961 Act; the corresponding no-PAN provision of the 2025 Act) applies. Generally it requires the highest of the specified rate, the rate in force or 20%, but for this provision (section 194-O of the 1961 Act) the rate is specifically 5%. Cite the rule, not just the figure.

Small participant exemption

No deduction if resident individual or HUF, gross amount of sales or services facilitated by that operator in the tax year ≤ ₹5,00,000, and PAN or Aadhaar furnished

All three conditions must be met. The ₹5,00,000 test is on the participant's gross amount facilitated by that operator in the tax year. Companies, firms and non-residents do not get this relief.

GST in the base

If GST is shown separately in the invoice or the payment record, base = gross amount excluding GST

This follows the CBDT clarification (Circular 20/2021), which was issued under section 194-O of the 1961 Act. Apply the same position to the corresponding provision of the 2025 Act. If GST is not shown separately in either, tax applies on the whole amount.

Overlap with other provisions

E-commerce provision overrides TDS under sections 194C (contract), 194H (commission), 194I (rent) and 194J (professional or technical fees) of the 1961 Act for the same transaction, but does not apply to an amount on which tax is already deducted or collected under another provision

The override covers only those four sections. A TCS already collected on the same amount takes that amount out of e-commerce TDS.

Timing of deduction

Deduct at the time of credit to the participant's account or at the time of payment, whichever is earlier

Payment through a payment gateway or collection agent also counts as payment for this purpose.

TDS versus TCS

TDS: payer deducts from the payment. TCS: seller collects from the buyer on sale or receipt

E-commerce operator withholding is TDS. Credit goes to the deductee.

Compliance chain

Deduct → deposit → file quarterly TDS statement → issue TDS certificate

Needs a valid TAN. Late deposit or filing attracts interest, fee and possible penalty.

Quick revision

• Digital business can earn in India without a physical presence, which is why special rules exist.
• Check the current status of each levy before answering. Some earlier digital levies have been withdrawn.
• Always test residence and treaty position before applying a rule to a non-resident.
• A virtual digital asset is taxed under a special regime, not as a normal capital asset.
• Income from transfer of a VDA is taxed at a flat 30%. The only deduction allowed is the cost of acquisition. No deduction for any other expenditure or allowance is allowed.
• Loss on transfer of one VDA cannot be set off against income from transfer of another VDA or against any other income, and it cannot be carried forward.
• Tax can be deducted on the transfer of a VDA, so check who pays and who deducts.
• A gift of a VDA can be taxable in the receiver's hands, so check the relationship and the value.
• For forex differences, first decide whether the item is revenue or capital.
• For capital items, exchange differences generally adjust the cost of the asset or the related amount, not the profit and loss account.
• Check whether the payer must deduct tax or report the transaction before concluding on compliance.
• Write answers as rule, facts, conclusion, and always state the section or rule only if you are sure of it.

Common mistakes

• Saying SEP exists only if both the payments and users tests are met. Fix: The limbs are alternatives. Meeting either one is enough.
• Taxing the entire global profit of the foreign company in India. Fix: Only income attributable to the Indian transactions or user activity is deemed to accrue in India.
• Deducting brokerage, exchange fees or electricity to arrive at VDA income. Fix: Allow only the cost of acquisition. Write 'no other deduction allowed' in your answer.
• Setting off a loss on one crypto against the gain on another. Fix: Compute each VDA transfer separately. Treat every loss as nil for tax.
• Applying the rate to the operator's commission Fix: The base is the gross amount of sales or services facilitated, not the commission earned by the operator.
• Giving the ₹5,00,000 relief to every participant Fix: Only a resident individual or HUF with PAN or Aadhaar furnished qualifies. A company with sales of ₹3,00,000 still suffers deduction.

Exam tips

• Always state both SEP limbs and say that either limb is enough.
• Quote the thresholds as ₹2 crore of payments and 3 lakh users, say they were notified under the 1961 Act (Notification 41/2021), and add that the current notification should be checked. Then compare them with the numbers given in the case.
• Write the answer as provision, facts, conclusion. Examiners reward the nexus logic and the attribution limit.
• In MCQs, watch for distractors such as no office, no agent or servers abroad. These do not defeat SEP.
• Link this topic with the treaty PE rules and the abolition of the equalisation levy. Mention both in a long answer, and describe the levy as historical.
• In a case with several crypto and NFT trades, build a small table of consideration, cost and result for each transfer. Mark loss cases as nil.
• Always say why a deduction fails: only cost of acquisition is allowed. Examiners give marks for the reason, not only the figure.
• For TDS, state who deducts (buyer, or exchange or broker where one is involved), the rate of 1%, the payer-based threshold and that it applies on the consideration. Then add the credit to the seller.