All about complicated status of Metaverse and GST

Authored by: Krishan Arora – Partner, Sachin Sharma – Director & Rahul Jhawar – Assistant Manager | Grant Thornton Bharat LLP

Table of Contents

1. What is Metaverse?

2. Transactions in Metaverse

3. GST implications

Metaverse, often described as the future of internet, has undoubtedly garnered a lot of attention recently. Imagine a virtual world in which people live, work, shop and interact with each other, all from the comfort of their couch. This might seem like a well poised script from a sci-fi movie, but the evolution of technology suggests otherwise. As per a recent survey, an average person spends a total of 6 hours and 57 minutes looking at a screen each day (for internet-connected activities). With the world marching towards a more digital future, metaverse is soon going to be the reality. The recent developments in this space also highlight the same, whether it is rebranding of “Facebook” to “Meta” to specifically signal its focus on the development of metaverse, or Nike filing new trademarks to sell virtual Air Jordans in metaverse. The seriousness can also be seen from the fact that UAE has set up a ministry in the metaverse for doing business with companies and to sign bilateral agreements with foreign governments.

The evolving world would pave the way for digital and highly integrated economies. In fact, the global metaverse market size is expected to expand at a compound annual growth rate (CAGR) of 39.4% from 2022 to 2030 with the potential market opportunity estimated at more than USD 1 trillion in yearly revenues. The above facts generate multiple questions in terms of tax implications on transactions in the virtual world from Goods and Services Tax (GST) perspective. Before delving into such implications, let’s first understand what metaverse means and what it would actually look like.

1. What is Metaverse?

Metaverse is not specifically defined anywhere as to what it actually is. The term metaverse was first used by author Neal Stephenson in a 1992 science-fiction novel named ‘Snow Crash’ which envisioned a virtual-reality based successor to the internet.

According to technology experts or people across different industries and domains, it is a 3-dimensional virtual space which would connect users in all aspects of their lives. It would allow people to work, play, meet, shop etc. through an integrated virtual experience. Further, metaverse would be driven by augmented reality (AR), with each user controlling a character or an avatar. For example, one might attend a meeting with its peers in the virtual office using virtual reality (VR) headsets or holographic simulations, play a blockchain-based game, and shop different things, all inside the metaverse.

It is believed to have certain foundational characteristics such as a sense of immersion, real time interactivity, interoperability amongst different metaverse platforms, etc. Such characteristics bundled with highly advanced technology could cater to different existing and new use cases spread across multiple industries. The use cases comprise of product marketing, education, next generation commerce, virtual tourism etc. in different industries, including apparel and fashion, ed-tech, retail, entertainment and many more. In order to serve such diverse use cases at a large scale, existing technical infrastructure needs to be updated. Some of the leading companies which are working on making this a reality and are tapping into the valuable virtual markets are Meta, Microsoft, Epic Games, etc.

1.1 Integration of Metaverse and Blockchain based cryptocurrency

Although metaverse would be a technology marvel, it would not be complete in itself. Some very important pieces in this puzzle need to be put together in order to establish a truly virtual economy, such as how would a transaction be safely executed in the virtual world, what would serve as a proof of ownership etc. This is where blockchain based cryptocurrencies come into play, as in the metaverse such digital currencies could be used to buy different virtual assets to establish ownership. The virtual assets or unique tokens bought in metaverse would be considered as non-fungible tokens (NFTs). In this way, cryptocurrency could serve as a fuel in the metaverse economy.

Currently, metaverse platforms are also establishing their official cryptocurrency for executing any transaction on their platform. Metaverse platforms such as Decentraland and Sandbox are perfect examples wherein one can purchase different virtual assets by using its official cryptocurrency, i.e., MANA and SAND respectively.

On the contrary, there are experts who challenge the very idea of cryptocurrency being mandatory for the metaverse economy. There is a belief that the fiat currency (i.e., currency issued by the government such as INR, USD etc.) can fill such a gap. Although this opinion has not gathered a lot of support in the recent times, it can possibly become a reality in the future.

2. Transactions in Metaverse

Few transactions that would be evident in metaverse are as follows:

• • Sale of a virtual land
    In metaverse, one can buy a piece of land just like the real world. Each piece of land has a unique address attached to it, which makes it an NFT.
    In recent times, different individuals and entities have bought land in metaverse.
    For example, Daler Mehndi, an Indian singer, has bought virtual real estate on the Indian metaverse platform called Party Nite and named it Balle Balle Land. This land will house the Daler Mehndi store to sell merchandise, host films, events, and music concerts.
  • Renting/Leasing of virtual land
    Land in metaverse can also be taken on rent/lease for different purposes such as running businesses or hosting different events.
  • Procuring goods/services
    In metaverse, one can procure different goods/services such as cars, sneakers, clothes etc. just like the real world.
    For example, Nike has recently sold virtual sneakers in the metaverse. Adidas also launched its merchandise in metaverse last year.
  • Hosting an event
    Different types of events such as music concerts, team meetings, virtual sessions can also be hosted in metaverse and people from any part of the world can attend such events.
    For example, an American artist named Travis Scott performed a concert in the Fortnite videogame space where more than 12 million people showed up in their avatars.

The aforementioned transactions are only a tip of the iceberg when it comes to opportunities and transactions that would become a part of the virtual world. Since metaverse is in a stage of infancy, it is difficult to accurately predict what it would look like in its entirety.

3. GST implications

Since virtual assets or unique tokens bought in the metaverse would be considered as non-fungible tokens (NFTs), it becomes important to understand how NFTs would be taxed and what would be the challenges, keeping in mind the existing GST legislation.

Different opinions exist regarding classification of NFTs from GST standpoint and the same have been briefly discussed hereunder along with its challenges. It may be noted that for ease of understanding, discussion would be steered focusing primarily on the current GST laws of India.

A. Considered as digital services/Online Information Database Access and Retrieval (OIDAR) services

One school of thought regarding the taxability of NFTs is that it would be taxed in a similar manner as digital photos, music, information etc., i.e., as OIDAR services since delivery of the same is also mediated over internet only. Accordingly, the respective provisions related to OIDAR services would be applicable in case of such transactions.

However, it is pertinent to note that in order to classify as OIDAR services, there is an additional condition of minimal human intervention. In respect of NFTs, it needs to be analysed that in case where a live event is organized in the metaverse platform, whether it can be claimed that there is minimal human intervention.

B. Linking of NFTs to the underlying asset

Another school of thought is that classification of NFTs should be linked to the underlying asset it represents. In case the underlying asset is a good, the NFT would also be classified as a good and taxed accordingly. This view attracts diverse challenges such as will there be an actual movement of goods, who will actually pay the tax, who will collect the tax (i.e., within whose jurisdiction such transaction takes place) etc. The said challenges have been briefly discussed hereunder.

• • Classification issues
    Under GST laws, a lucid classification has been provided for goods and services, movable and immovable assets, etc. However, with the emergence of metaverse, a need has arisen to revisit the same since it would be inappropriate for transactions happening in the virtual world to be bucketed in the same category.
    For example, when someone from India buys a McLaren 720S as an NFT in the digital world from a US based entity, the first question that arises is whether it would be considered a movable asset, despite there being no actual movement in the real world.
  • Jurisdiction of transaction
    One of the primary considerations in respect of transactions in the virtual world would be jurisdiction of the same i.e., who will collect tax on such transactions.
    The current tax laws have laid down specific place of supply provisions to determine the jurisdiction of transactions incurred in the real world. For instance, in some cases it would be the location of supplier or recipient, whereas in other cases it would be the place where performance was held or the place where the immovable property is located. The tax is accordingly collected by the tax authorities within such jurisdictions.
    However, in the digital world, since there are no physical borders, it is hard to trace where the transaction takes place and who would actually collect the tax.
    For example, someone rents a space in the virtual world, say Decentraland, for business purpose. Since such virtual space has no physical borders, it is difficult to conclude the place of jurisdiction where such taxes ought to be levied and collected. Similar issue would arise in a case where any event is hosted in the virtual world.
    In order to tackle the above issue, the authorities need to revisit the related provisions. One possible solution could be that the authorities map the IP address and location of supplier or recipient to determine the jurisdiction of such transactions.
  • Obligation to pay tax
    Another important aspect which needs to be established is that who would actually be liable to discharge tax on the transactions incurred in the metaverse.
    For example, Nike has setup a digital store named Nikeland in the metaverse using Roblox platform. (13) The question which arises here is that when Nike sells its merchandise through that store as an NFT, who would be required to discharge tax, would it be Nike existing in the real world or the Nike store opened in the virtual world.
    In order to get clarity on the same, it is important to establish whether the entity doing business in the virtual world is a separate entity and required to take a separate registration or the same would be linked to the entity registered in the real world.

C. Considering it as a virtual digital asset

Recently, in the existing direct tax legislation, clause 47A has been inserted in Section 2 vide Finance Bill 2022 to define virtual digital assets which includes NFTs. This would also ring an alarm as to whether a transaction in digital world would be considered as a barter transaction or not. The said issue has been discussed in detail hereunder.

• • Barter transaction
    As discussed above, any NFT in the metaverse can be purchased using the official cryptocurrency of such metaverse.
    For example, one can buy a plot of land or any other NFT in Sandbox metaverse platform, using the official cryptocurrency of the platform i.e., SAND.
    The issue which would arise here is that in case NFT and cryptocurrency are considered as virtual assets, whether a transaction involving the exchange of two against one another would qualify as a barter transaction or not. The tax provisions need to be applied accordingly. Moreover, constant fluctuations in the value of cryptocurrency (even in 24 hours period) would pose a challenge with respect to valuation of such transactions.
    Additionally, the challenges related to jurisdiction of transaction and obligation to pay tax as mentioned above would be relevant in this scenario also.

D. Considering it as a financial instrument

There is yet another view regarding the classification of NFTs as a financial instrument. However, the existing GST legislation does not support the same. The definitions of money and security are specifically defined in the existing laws as follows:

Money has been defined as

“The Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognized by RBI, when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.”

Security has been defined to include:

1. “Shares, scrips, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate:

a. Derivates
b. Units or any other instruments issued by any collective investment scheme to the investors in such schemes
c. Security receipts as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial assets and Enforcements of security interest Act, 2002
d. Units or any other such instrument issued to the investors under any mutual fund scheme
e. Any other certificate or instrument issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivables.

2. Government securities

3. Rights and interests in securities”

The NFTs are not specifically included in the aforementioned definitions. Accordingly, it may be construed that NFTs can not be classified as a financial instrument and therefore not excluded from the ambit of GST.

The complexities involved in classification of metaverse platforms as a facilitator coupled with diverse opinions and challenges with respect to transactions executed in the virtual world makes it even more complicated.

The issues mentioned above throw light only on a few challenges which would arise from GST standpoint with the introduction of metaverse. But this is just a teaser of what the future of metaverse holds. Since metaverse is still being built, we will witness new layers unfolding overtime which would only aggravate these challenges.

Way forward

One cannot possibly deny that with the advent of technology, the world around us is changing at a rapid pace. With the rise of metaverse, not just our lives but our economies too would be impacted massively. Consequently, a proactive approach is imperative to help us adapt with such changes smoothly.

Accordingly, the policy makers and tax authorities must take a step ahead to clear the dust around taxability of transactions in the metaverse. The provisions in place need to be revisited or a completely new set of guidelines should be issued covering in detail every aspect from a taxation perspective, such as, jurisdiction for levying tax, classification as goods or services, valuation, place of supply, rate of tax etc. This hands-on approach by the Government of India will also result in an evident increase in tax revenue. Therefore, it is the need of the hour that ambiguities related to such transactions are addressed in the interest of all stakeholders.

(With inputs from Sanyam Narang, Consultant, Grant Thornton Bharat LLP)

Note: Views expressed are personal. Comments are generic in nature and readers may seek specific professional advice based on their respective facts.