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Unleashing Non-Fungible Tokens (NFTS): Tax Implications and Consideration of Indirect Tax

Updated: Feb 8

by Utkarsh Jindal*


INTRODUCTION:

Non-Fungible Tokens (“NFT”) are unique digital assets and cannot be treated as currency. NFTs are usually termed with Cryptocurrency or other digital assets but it is different as they cannot be replaced with another NFT. NFT can be defined as digital arts or modern-day collectables.

NFTs are those tokens that live on a blockchain and represent ownership of unique items. It has a unique fingerprint, token symbol, or token name and it can sell that token on the blockchain through a transaction. Blockchain allows tracking of the NFT’s owner and the cost, it was sold on in the past.

In recent times, where digitalization and technology are going to be the primary source of economic development, it becomes very important for governments to understand digital assets and currencies and regulate them to save the general public from any kind of unforeseen abuse of power by the owner. People across the globe are now creating NFTs and it is one of the fastest-growing economic advancements. For instance, the CEO of Twitter Mr. Jack Dorsey created an NFT and sold his first tweet for approx. $2.9 million, NBA sold highlights of Lebron James for $200000 in an NFT trade.


NFTS IN THE INDIAN CONTEXT:

India affects the world on a very large scale and with the incoming of the NFT various artists, auctioneers and intellectuals are of hope that NFT will be a huge success in India. After Covid-19 India has also shifted towards digitalization rapidly.

The main reason NFTs are gaining impetus in the Indian market is putting the middleman aside. The second reason can be royalty is paid to the owner on each secondary sale of NFT. This skyrocketing of NFTs started when Vignesh Sundaresan, an Indian based in Singapore and CEO of Portkey Technologies bought a digital collage, which was sold by Beeple. Now, there are various other platforms where you can buy and sell NFTs like Metadesk or Openseas


INDIAN PERSPECTIVE OF TAXATION ON NFTS:


DIRECT TAX:

Budget 2022 announced that NFTs will be taxed at 30% just like any other virtual digital asset under Section 2 (47A) of the Income Tax Bill, 2022. From April 1st, 2022, NFTs are taxed in India and no deduction is allowed except the cost of acquisition. Further, no set-off is allowed in case of loss from any other income.

With NFT, a person can be involved in two ways:

(1) Creator of NFT- who creates an NFT and sells it for money,

(2) Investor in NFT - who buys NFT so that he can sell it later at a better price.

Furthermore, on June 30th 2022, the Central Board of Direct Taxes (CBDT) issued two notifications to clarify what is NFT for tax purposes and what’s not an NFT for the same.

According to the first notification loyalty cards, gift vouchers, gift cards, mileage points, etc are not included in the definition of NFT.

As per the second notification NFTs that result in the transfer of ownership of underlying tangible assets and transfer of ownership of such tangible assets is legally enforceable is also excluded from the definition of NFTs.


INDIRECT TAX:

When it comes to the imposition of indirect tax in NFT, certain points have to be considered such as the sale of NFT, payment of gas fee by the creator, or payment of royalty. NFT is a digital token and its ownership is just of digital assets. For NFTs to be part of Tax, NFTs have to be a supply under the ambit of goods and services tax (GST). And even if the government declares it as a supply, it also needs to identify that such a sale is in the course and furtherance of business. Thus, the classification of NFT is necessary to understand and the whole tax implication would depend on the classification of the underlying asset. It is to be determined whether it can be termed as goods or services, securities, or actionable claims.

If the underlying asset is an artwork or painting, then, in that event, the underlying assets may qualify to be 'goods', however, such goods being digital and in the form of NFT, would not be tangible.

Section 7 of the CGST Act clearly defines various forms of supply of goods and services (including the sale, transfer, lease, and barter). As per the aforementioned section, supply should be

(a) goods or services

(b) made for a consideration

(c) in the course or furtherance of business;

(d) made by a taxable person

(e) a taxable supply.

On the basis of the above conditions, NFT has to be a supply and not money or securities. Although NFT transactions can be classified as derivatives, they can be enforceable only if the central government notifies such transactions as valid. Since NFTs are not currently recognized as derivatives by SEBI in India, therefore same cannot be considered securities by the law.


NFT AS GOODS:

Under the CGST goods have to be “movable”, however, it is now a settled position in law that goods are a wider concept and include both tangible and intangible assets.

In the judgment of Tata Consultancy v. State of Andhra Pradesh, the Supreme Court’s Constitution Bench dealt with the question of whether certain software would fall within the meaning of “goods” under the State Sales Tax Law. The bench held that the term “goods” is very wide and includes every movable thing be it tangible or intangible and a transaction of software would be a sale of goods and indirect tax can be levied.

Thus, even if, NFTs are intangible, made in the market, and can be bought and transferred it can be said that NFTs can be brought under the ambit of GST as per Indian law.


AMITABH BACHCHAN CASE:

In a recent case, DGGI issued an evasion notice to Amitabh Bachchan in the matter of non-payment of GST on the supply of Non-Fungible Tokens (NFTs) after which he had to pay GST of 1.09 cr.

In this case, Mr Bacchan had entered into an agreement with Rhiti Entertainment Pt. Ltd, Singapore for conversion of his content into NFTS and to market, promote, and sell through any virtual auction platform. There were some NFTs offered on the digital platform, which were:

1. Madhushala NFT Collection

2. Iconic Vintage Posters NFT

3. BigB Punk: These are digital images created keeping Amitabh's unique styles into consideration.

The said sale of the NFT was considered a supply of goods and was classified as “goods” under S. No. 453 of Schedule III of Notification No.1/2017-Integrated Tax (Rate) which mentions that “goods” that are not specified in Schedule I, II, IV, V, or VI and falling under any chapter will attract 18% of IGST.


WAY FORWARD:

Though NFT is the buzzword of the town, it comes with its own basket of complications and intricacies that needs to be analyzed, evaluated, and thought upon on a holistic basis. It is time that a regulatory authority is formed for all the parties to the transaction (creators, buyers, and platform operators) to regulate and streamline the transaction in NFTs. The regulatory authority should release or recommend guidelines, clarifications, and circulars addressing the mechanism, issues, and intricacies related to valuation, legality, and tax including both from a direct and indirect tax perspective.

However, it is amply clear that revenue authorities intend to levy GST on NFT. Hence, the sale of NFT will be treated as a supply of goods. And, in some cases where there is no sale of NFT but involves the temporary transfer of NFT (license/ right to use), the same may qualify as a supply of services.

At present, NFTs are not been recognized as valid legal tender or foreign currency by RBI in India, therefore the same cannot be construed as money for the purposes of the law. The day, when NFT comes under the definition of money, it has to go out of the ambit of GST. Thus, it is the need of the hour to unleash such unknown aspects of the current sensation globally.

* Utkarsh Jindal, is a 4th-year law student at Rajiv Gandhi National University of Law, Patiala at the time of the publication of this blog.

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