GST Implications on Non-Fungible Token (NFT)

1. GSTIMPLICATIONSONNON-FUNGIBLE TOKEN(NFT) https://taxguru.in/goods-and-service-tax/gst-implications-non-fungible-token-nft.html WeneedtounderstandGSTimplicationonthefollowingissues Whether‘non-fungibletokens’aretaxableunderGSTlaw? If theanswerisinaffirmative,whetherNFTwouldbeclassifiableas ‘goods’or‘service’?Further,whatisthe rateof tax under the law? Beforewedwelluponthelegalissuesathand,itisimperativetounderstandnatureofNon-fungibleToken(‘ NFT’)andwhethersamecanbecategorizedas‘DigitalAsset’forthepurposesofthelaw. UnderstandingNon-fungibleToken At the outset, it is pertinent to mention here NFT has not been defined under Goods and Services Tax Act, 2017 (“CGST Act”) nor under the rules framed thereunder. Hence, it is imperative for us to place reliance on the dictionarymeaning/ literature availablein the publicdomain relating toNFT:- AsperWikipedia,NFThasbeendefinedasunder:-[1] A non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digitalledger, that can be soldand traded. Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because eachtokenisuniquelyidentifiable,NFTsdifferfromblockchaincryptocurrencies,suchasBitcoin……. AsperonlineMerriamWebster,NFThasbeendefinedinthefollowingterms[2]:- a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specificrights relating to it) Non-fungible token is, most simply, a unique digital asset. It can be a photo, a logo, a meme, a music album, a basketball highlight, a collage, a tweet, a newspaper article, a video; basically, anything that canget online … AlsoaspertheAustralianTaxationOffice,NFThasbeenexplainedasunder:-[3] WhatisanNFT

2. Anon-fungibletokenis: aunitofdatastoredonadigitalledger uniqueandisnotinterchangeable adigitalasset You can use an NFT to represent an ownership interest in any tangible or intangible asset, even where you storethe asset outside of a digitalledger. Onabarereadingoftheaforesaiddefinition,wehavededucedthefollowingobservations NFTisanon-interchangeabledigitaltokenthatoperatesonapublicblockchainandrepresentsatoken ofownership of aunique item (digitalor physical) thatcan besold and traded; NFTisuniqueandunlikeotherfungibleassetsorcurrenciessuchasBitcon,theycannotbeexchanged withoneanother.Whenaphoto,art(content)isuploadedintocryptoblockchain,itisturnedintoanNFT, meaningthat thepiece ofart isembedded intothe blockchain, andcannot bereplicated; NFTcanrepresentawidearrayofthingssuchasart,music,literature,realestate,iconictweets,etc.; It is also noteworthy here to mention that the Finance Bill 2022has proposed an amendment under the Income tax law, whereby NFT has been statutorily recognized as ‘Virtual Digital Asset’. Section 2(47A) of the Income TaxBill, 2022,seeking to taxtransactions on virtualdigital assets, definesit as under: (47A)“virtualdigitalasset”means anyinformationorcodeornumberortoken(notbeingIndiancurrencyorforeigncurrency), generatedthroughcryptographicmeansorotherwise,bywhatevernamecalled,providingadigital representation of value exchanged with or without consideration, with the promise or representation of havinginherentvalue,orfunctionsasastoreofvalueoraunitofaccountincludingitsuseinany financialtransactionorinvestment,butnotlimitedtoinvestmentscheme;andcanbetransferred,stored ortraded electronically; anon-fungibletokenoranyothertokenofsimilarnature,bywhatevernamecalled; anyotherdigitalasset,astheCentralGovernmentmay,bynotificationintheOfficialGazettespecify: Basis the above definition and keeping in mind intention of the legislature to include NFT under virtual digital assets, it can be safely concluded that NFT can be categorized as ‘Digital Assets for the purposes of thelaw. After examining the nature of NFT, It is imperative to analyze as to whether NFT transactions are exigible to GST.Further, what would beits classification and rate oftax? Relevantprovisions Section 9 of the CGST Act is charging section under the GST law which provides for levy of GST on all intra- Statesuppliesofgoods orservicesor both, exceptonthe supplyofalcoholicliquor forhumanconsumption. Section 7 of the CGST provides for inclusive definition and covers all forms of supply of goods and or services [ such as sale, transfer, barter, lease, rental, exchange etc.]. Relevant extract of section 7 of the CGST Act is givenbelow for reference.

3. “7.[1]ForthepurposesofthisAct,theexpression“supply”includes–“7.[1]ForthepurposesofthisAct,theexpression“supply”includes– [a] All forms of supply of goods and services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtheranceof business; …….” Based on the above extract, the following parameters which can be adopted to characterize a transaction as supplyare: Supplyshouldbeofgoodsorservices; Supplyshouldbemadeforaconsideration; Supplyshouldbemadeinthecourseorfurtheranceofbusiness; Supplyshouldbemadebyataxableperson; Supplyshouldbeataxablesupply. It is relevant to mention that predominantly GST will be charged only when all the aforesaid conditions are fulfilled subject to certain exceptions mentioned therein. However, where any one of the aforesaid conditions is not satisfied, then such transaction cannot be treated as ‘supply’ under the GST ambit and consequently no GST willbe levied thereon At this juncture, it is pertinent to note that Section 2[52] of the CGST Act defines goods as means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract ofsupply. Further, section 2 (102) of the CGST Act defines ‘services’ to means anything other than goods, money and securities but includes activities relating to the use of money or its conversation by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination, for which a separate considerationis charged On a perusal of the above , it is amply clear that the term ‘Goods and Services’ are of wider ambit and excludes moneyand securities Basis the above, it is amply clear that unless there is supply of ‘Goods’ or ‘Services’, GST on the same wouldnotbeapplicable.Therefore,tobringunderthepurviewofGST,NFTneedstoqualifyas goods/services. Where NFT qualifies as money or securities, same would be outside the ambit of the GST law. Hence, it is imperative for us to examine and analyze whether NFT would be treated as goods/ servicesor money or securities. NFTasmoney ThetermMoneyhasbeendefinedundersection2(75)oftheCGSTActasunder:- MoneymeanstheIndianlegaltenderoranyforeigncurrency,cheque,promissorynote,billofexchange, letterofcredit,draft,payorder,travellercheque,moneyorder,postalorelectronicremittanceorany

4. other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligationorexchangewithIndianlegaltenderofanotherdenominationbutshallnotincludeany currencythat is held for itsnumismatic value. Perusaloftheterm‘Money’evidencesthatmoneymeanslegaltenderorforeigncurrency,recognizedbyRBI. Theterm ‘Currency’ hasbeen defined inSection 2(h) of theFEMA as follows: “Currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or other similar instruments,as may be notifiedby the Reserve Bank; Hence, for any instrument to be considered as currency it is essential that the same has to be notified by Reserve Bank of India (RBI).However, at the present, NFTs are not currently recognised by RBI in India, therefore the samecannot be construed asmoney for the purposes ofthe law. NFTassecurities TheCGSTActdefinessecuritiesunderSection2(101)as“shallhavethesamemeaningasassignedtoitin clause(h) of section 2of the Securities Contracts(Regulation) Act, 1956 ( “SCRA”) Theterm“securities”intheSecuritiesContracts(Regulation)Act,1956,hasbeendefinedtoinclude— shares,scrips,stocks,bonds,debentures,debenturestockorothermarketablesecuritiesofalike naturein or ofany incorporated company orother body corporate; (ia)derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of FinancialAssets and Enforcementof Security Interest Act,2002; (id)unitsoranyothersuchinstrumentissuedtotheinvestorsunderanymutualfundscheme; (ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable including mortgagedebt, as the case may be; Governmentsecurities; (iia)suchotherinstrumentsasmaybedeclaredbytheCentralGovernmenttobesecurities;and iii)rightsorinterestsinsecurities;” NFTs cannot fall within the meaning of shares, scrips, stocks, bonds, etc. as these are in one way or the other attached to a body corporate for deriving their value. However, it is important to take a closer look as to whether NFTscan come within the meaningof “derivatives”.

5. Section2(ac)oftheSCRAdefinesderivativestoinclude: (A)asecurityderivedfromadebtinstrument,share,loan,whethersecuredorunsecured,risk instrumentor contract fordifferences or anyother form ofsecurity; NFT transactions can be classified as derivatives only when the transaction in question resembles either a risk instrument or a contract for differences. Some NFT marketplaces like NFT20 encourage their users to participate in speculative trading. An example of speculative trading can be when a user enters into a contract that gives them the option to sell or not to sell an NFT on a future date at a pre-determined price. In this case, the transaction will qualify as a derivative since it is like the contract for differences. Therefore, in cases where the NFTis being soldas a speculativetrading instrument, itmay qualify asa derivative. However, currently, derivative contracts concerning NFTs are not legally enforceable under Section 18A. According to Section 18A ofa legally enforceable derivative should be traded on a recognized stock exchange, settled by a recognised clearinghouse, or operate on terms notified by the central government. Currently,none of theserequirements is fulfilled byNFT transactions. 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 recognised as derivative by SEBIinIndia, thereforethesame cannotbeconsidered asassecurities forthepurposes ofthelaw. NFTasgoods From the definition of goods as extracted above, it is clear that for a thing to qualify as goods it must be moveable. It is now settled position of the law that the definition of “goods” is wide enough to include all kindsof goods– tangible and intangible materials. Reference may drawn to the judgment of Tata Consultancy Services Vs. State of Andhra Pradesh [271 ITR 401 (SC), wherein the constitution bench of Supreme Court on the question whether certain software would fall withinthemeaningofgoodsunderthestatesalestaxlawanditwasheldbythemajoritythatthetermgoods used in the Constitution of India is very wide and under the relevant Act it includes all types of movable properties irrespective of tangible or intangible and a transaction sale of computer software is a sale of goods within the meaning of relevant sales tax act. In the concurring opinion, Hon’ble Justice Sinha laid down a three-part test for software to classify as goods i.e. (a) its utility (b) capable of being bought and sold (c) capable ofbeing transmitted, transferred, delivered,stored and possessed. In the instant case, it can be argued that NFTs are intangible and are made, marketed, and stored on physical servers. They can be bought and sold, transmitted, transferred, delivered, stored, and possessed. Further,thedefinitionofgoodsincludesintangiblematerialsaswell,henceNFT mayqualifyasgoods. SincethescopeofsupplyundertheGSTlawinter-aliaincludessale.Hencesaleofnon-fungibletokens canbetreatedas supplyofgoods andconsequently.GST shallbeleviableon suchsaletransaction. . ClassificationandGSTRate AsdiscussedintheforegoingparasthatNFTisanintangibleasset.However,tilldatethereisnoclarityby Governmentwhethersameisclassifiableasgoodsorservices.Thus,ifsaretobeconsideredasgoods,thenat presentsincethereisnosuchclassificationintheNotificationNo.1/2017-CT(Rate)dated28thJune2017 perse.Thus,inabsenceofspecificationthesamewouldbeclassifiableat18%asperentryno.453ofSchedule IIIof Notification

6. Theentryreadsasunder:– GoodswhicharenotspecifiedinSchedule I,II, IV,V, orVI 453 AnyChapter However, if the same are to be treated as services, then in the absence of clarification by government the same can be classifiable under the Heading 9997 ‘Other Services’, taxable @ 18% as per Notification 11/2017- CT(Rate)dated 28thJune 2017. RecentDGGIinvestigationinallegedNFTcaseofAmitabhBacchan Basedonthenewsreportsavailableinthepublicdomain,wewouldliketosetouttherecentDGGIinvestigation inthematter ofAmitabhBacchanwhichmay helpinunderstanding theGSTimplication onNFT. Issue:Non-paymentofGSTonsupplyofNon-FungibleTokens(NFTs) Detection:Rs.1.09 Cr) Facts: Intelligence gathered has suggested that Shri Amitabh Bachchan has entered into an agreement with Rhiti Entertainment Pte. Ltd , Singapore for conversion of his content into NFTS and to market, promote and sale of thesamethroughanauctionplatform.TheNFTsofferedforauctionincludethefollowingdigitalassetsof ShriAmitabh Bachchan: MadhushalaNFTCollection: IconicVintagePostersNFT: BigBPunk:ThesearedigitalimagescreatedkeepingtheAmitabhuniquestylesintoconsideration. During the investigation, the said liability was admitted by the assessee and the same was paid by debiting the cash ledger. The taxpayer has considered sale of NFT as supply of Goods and has classified it in terms of Sr.No.453ofscheduleIIIofNotificationNo.1/2017-IntegratedTax(Rate)dated28.06.2017which mentions that Goods which are not specified in Schedule I, II, IV, V or VI and falling under any chapter willattract 18% of IGST. Based on the above, it is amply clear that intention of revenue authorities is to levy GST on NFT. Hence sale of NFT are to be treated as supply of goods. However in some cases (where there is no sale of NFT but involves temporary transfer of NFT (license/ right to use) , then same may qualify as supply of services. In case of goods, authorities may demand GST paying tax @ 18%in terms of Sr. No. 453 of schedule III of NotificationNo.1/2017-CT(Rate)dated28thJune2017.Incaseofservices,authoritiesmaydemandtax,

7. taxable@18%asperNotification11/2017-CT(Rate)dated28thJune 2017. Conclusion Basedontheabove,wewouldliketosummarizeourviewsasunder:- Keeping in mind the recent proposed amendment under the Income Tax law, whereby NFT has been includedinthedefinitionofvirtualdigitalassets,itcanbesafelyconcludedthatintentionofthelegislature isto treat NFT as‘Digital Assets for thepurposes of the law. Tofall under the purview of GST, NFT needs to qualifyas goods/services. Where NFT qualifies as money orsecurities,samewouldbeoutsidetheambitoftheGSTlaw. At the present, NFTs are not been recognised as a valid legal tender or foreign currency by RBI in India, thereforethe same cannotbe construed asmoney for thepurposes of thelaw. Thedefinitionofsecuritiesinter-aliaincludesderivative.IncaseswheretheNFTisbeingsoldasa speculative trading instrument, it will qualify as a derivative. Since NFTs are not currently recognised as derivatebySEBI inIndia,therefore NFTmaynot qualifyassecurities forthepurposes ofthe law. Itisnowsettledpositionofthelawthatthedefinitionof“goods”iswideenoughtoincludeallkindsof goods– tangible and intangible materials. NFTs are intangible and are made, marketed, and stored on physical servers. They can be bought and sold, transmitted, transferred, delivered, stored, and possessed.hence NFT may qualify asgoods. SincethescopeofsupplyundertheGSTlawinter-aliaincludessale.Hencesaleofnon-fungible tokens can be treated as supply of goods and consequently. GST shall be leviable on such sale transaction.. Howeverinsomecases(wherethereisnosaleofNFTbutinvolvestemporarytransferofNFT(license/ righttouse),thensamemayqualifyassupplyofservices. In case NFT qualifies as goods, in absence of any classification, authorities may demand GST @ 18%intermsofSr.No.453ofscheduleIIIofNotificationNo.1/2017-CT(Rate)dated28thJune2017 .Incaseofservices,taxauthoritiesmaydemandGST@18%asperNotification11/2017-CT(Rate) dated28thJune2017. Non-fungibletoken–Wikipedia<https://en.wikipedia.org/wiki/Non-fungible_token> Non-fungible token Definition & Meaning – Merriam-Webster <https://www.merriam- webster.com/dictionary/non-fungible%20token> Income tax treatment of non-fungible tokens | Australian Taxation Office (ato.gov.au) <https://www.ato.gov.au/Individuals/Investments-and-assets/In-detail/Cryptocurrencies/Tax-treatment-of-non- fungible-tokens/#:~:text=A%20non%2Dfungible%20token%20is,a%20digital%20asset> ThisarticlehasbeenwrittenbyKapilMahani,ChartedAccountant,founderoftheCretumAdvisorybasedin Gurgaon,and Devang Bhasin, Advocateat Cretum Advisory.