Non fungible tokens (NFTs) have recently become more than a buzzword in the market, but they are transformative in nature. Each NFT is a unique digital asset and is primarily linked to the ownership of unique digital or physical goods.
NFTs are digital art or modern-day collectibles that cannot be replaced and cannot be used as currency. What also differentiates them from cryptocurrencies is the extra information they carry, which could be construed as money (though cryptocurrencies are not legalised tender in India currently). NFTs can be sold and purchased online and such trade primarily grants digital evidence of ownership of any item.
Recent trends in the NFT market evidence that digital ownership of an artwork, image, etc., comes with a whopping high monetary value attached to it. Yet, many still wonder how tokens on the internet have a monetary value at all, especially when the majority of them just represent digital ownership of an online image or an animation that one could, in principle, download a copy of for free. Primarily, scarcity and craze of enthusiasts to keep up with the trends drives the demand and the monetary value attached to such NFTs.
Current status in the Indian context
Various artists, platform owners and auctioneers are hopeful that NFTs would be the next horizon of Indian art. In India, the party has just begun, where celebrities are launching their exclusive NFTs. Primarily, NFTs are gaining impetus amongst the Indian creators due to the elimination of middleman and the royalty earned on subsequent sales. Creators are required to pay a listing fee, termed as ‘gas fee’ to the NFT trading platforms.
However, NFTs are largely unregulated. One can create and sell a NFT and there is no guarantee of its value. There is a huge scope of losses if the hype and craze dies down. Simultaneously, taxation on NFTs is an ambiguous area.
What are the indirect tax implications?
There are various aspects to be considered when it comes to indirect tax implications on a transaction involving NFTs.
1. Sale of NFT’s
NFT, merely being a digital token, showcases the ownership of digital assets. It is of utmost importance to evaluate if sale of such NFTs qualifies to be a supply for the purposes of the Goods & Services Tax (GST) law.
Rationally speaking, the classification of NFTs would primarily depend on the underlying asset it represents. If the underlying asset is an artwork, painting, then, the underlying assets may qualify to be ‘goods’, however, such goods being digital and in the form of NFT, would clearly not be tangible. Also, in sale of NFT, the ownership passes on to the buyer, however, it is a digital ownership and there is no sale of tangible goods to the buyer. Determination of classification of such sale and place of supply would also play an important role.
Another aspect which is required to be evaluated is whether NFTs, essentially being music, movies, digital content being supplied automatically through the internet with minimal human intervention, could also be classified as online information and database access retrieval (OIDAR) services.
In which event, provision of such OIDAR services by creators outside India to individuals, not registered for GST, would become taxable in India. The burden of collection and payment of taxes would lie on the creator of the NFT. It is also pertinent to evaluate the concept of intermediary in the Indian GST context.
Tax implications would have to be evaluated based on the nature of the NFT being sold to the buyer. Hence, each sale would have to be independently examined to assess the indirect tax implications based on the documentation, paperwork, legal aspects, etc.
2. Payment of gas fee to the platform operators
Payment of gas fees by the creators to the platform operators for listing of their NFTs would likely attract GST on such payments.
3. Payment of royalty on subsequent sale
Currently, there is no clarity on the mechanism for enabling royalty payments to the creators on subsequent sale of NFTs. However, royalty would be agreed as a percentage of the sale value, which would essentially give an impetus to the creators of NFT. Such royalty, being in relation to the NFT i.e., an underlying asset, would have to be evaluated to determine the tax implications on subsequent sale.
Way forward
Though NFT is the buzzword, it comes with its own intricacies that need to be analysed, evaluated and thought upon on a holistic basis.
It is time that a regulatory authority be formed to regulate and streamline the transaction in NFTs for all the parties to the transaction - creators, buyers and the platform operators. The regulatory authority should release or recommend guidelines, clarifications and circulars addressing the mechanism, issues related to valuation, legality, tax (direct and indirect) perspective.
From an indirect tax perspective, there is a lot of ambiguity and questions around the GST implications on NFTs. Aspects such as such transactions being in the course or furtherance of business, classification into goods or services, whether such transactions would qualify as OIDAR services, valuation to be adopted for the purposes of charging GST, applicable GST rate, input tax credit on such transactions, import related implications are part of the larger bouquet of intricacies from an indirect tax perspective. Thus, it is the need of the hour to unleash such unknown aspects around the current sensation globally.
Biren Vyas is partner at Grant Thornton Bharat
