GST Implications on Non-Fungible Token (NFT)

We need to understand GST implication on the following issues

1. Whether ‘non-fungible tokens’ are taxable under GST law?

2. If the answer is in affirmative, whether NFT would be classifiable as ‘goods’ or ‘service’? Further, what is the rate of tax under the law?

Before we dwell upon the legal issues at hand, it is imperative to understand nature of Non-fungible Token (‘NFT’) and whether same can be categorized as ‘Digital Asset’ for the purposes of the law.

Understanding Non-fungible Token

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 dictionary meaning/ literature available in the public domain relating to NFT:-

As per Wikipedia, NFT has been defined as under:-[1]

A non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded.

Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin…….

As per online Merriam Webster, NFT has been defined in the following terms[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 specific rights 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 can get online …

Also as per the Australian Taxation Office, NFT has been explained as under:-[3]

What is an NFT 

A non-fungible token is:

• a unit of data stored on a digital ledger
• unique and is not interchangeable
• a digital asset

You can use an NFT to represent an ownership interest in any tangible or intangible asset, even where you store the asset outside of a digital ledger.

On a bare reading of the aforesaid definition, we have deduced the following observations

• NFT is a non-interchangeable digital token that operates on a public blockchain and represents a token of ownership of a unique item (digital or physical) that can be sold and traded ;
• NFT is unique and unlike other fungible assets or currencies such as Bitcon, they cannot be exchanged with one another. When a photo, art (content) is uploaded into crypto blockchain, it is turned into an NFT, meaning that the piece of art is embedded into the blockchain, and cannot be replicated;
• NFT can represent a wide array of things such as art, music, literature, real estate, iconic tweets, etc.;

It is also noteworthy here to mention that the Finance Bill 2022 has proposed an amendment under the Income tax law, whereby NFT has been statutorily recognized as ‘Virtual Digital Asset’. Section 2(47A) of the Income Tax Bill, 2022, seeking to tax transactions on virtual digital assets, defines it as under:

(47A) “virtual digital asset” means

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

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 the law.

After examining the nature of NFT, It is imperative to analyze as to whether NFT transactions are exigible to GST. Further, what would be its classification and rate of tax?

Relevant provisions

Section 9 of the CGST Act is charging section under the GST law which provides for levy of GST on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption.

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 given below for reference.

“7. [1] For the purposes of this Act, the expression “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 furtherance of business;

…….”

Based on the above extract, the following parameters which can be adopted to characterize a transaction as supply are:

1. Supply should be of goods or services;

2. Supply should be made for a consideration;

3. Supply should be made in the course or furtherance of business;

4. Supply should be made by a taxable person;

5. Supply should be a taxable supply.

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 will be 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 of supply.

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 consideration is charged

On a perusal of the above , it is amply clear that the term ‘Goods and Services’ are of wider ambit and excludes money and securities

Basis the above, it is amply clear that unless there is supply of ‘Goods’ or ‘Services’, GST on the same would not be applicable. Therefore, to bring under the purview of GST, NFT needs to qualify as 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/ services or money or securities.

NFT as money

The term Money has been defined under section 2(75) of the CGST Act as under:-

Money means 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 recognised by the Reserve Bank of India 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.

Perusal of the term ‘Money’ evidences that money means legal tender or foreign currency, recognized by RBI.

The term ‘Currency’ has been defined in Section 2(h) of the FEMA 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 notified by 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 same cannot be construed as money for the purposes of the law.

NFT as securities

The CGST Act defines securities under Section 2(101) as “shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 ( “SCRA”)

The term “securities” in the Securities Contracts (Regulation) Act, 1956, has been defined to include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other 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 Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(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 mortgage debt, as the case may be;

 (ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

iii) rights or interests in securities;”

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 NFTs can come within the meaning of “derivatives”.

Section 2(ac) of the SCRA defines derivatives to include:

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

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 NFT is being sold as a speculative trading instrument, it may qualify as a derivative.

However, currently, derivative contracts concerning NFTs are not legally enforceable under Section 18A. According to Section 18A of  a 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 these requirements is fulfilled by NFT 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 SEBI in India, therefore the same cannot be considered as as securities for the purposes of the law.

NFT as goods

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 kinds of 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 within the meaning of goods under the state sales tax law and it was held by the majority that the term goods 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 of being 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, the definition of goods includes intangible materials as well, hence NFT may qualify as goods.

Since the scope of supply under the GST law inter-alia includes sale. Hence sale of non-fungible tokens can be treated as supply of goods and consequently. GST shall be leviable on such sale transaction. .

Classification and GST Rate

As discussed in the foregoing paras that NFT is an intangible asset. However, till date there is no clarity by Government whether same is classifiable as goods or services. Thus, if s are to be considered as goods, then at present since there is no such classification in the Notification No. 1/2017-CT(Rate) dated 28^th June 2017 perse. Thus, in absence of specification the same would be classifiable at 18% as per entry no. 453 of Schedule III of Notification

The entry reads as under: –

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 28^th June 2017.

Recent DGGI investigation in alleged NFT case of Amitabh Bacchan  

Based on the news reports available in the public domain, we would like to set out the recent DGGI investigation in the matter of Amitabh Bacchan  which may help in understanding the GST implication on NFT.  

Issue:  Non-payment of GST on supply of Non-Fungible Tokens (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 the same through an auction platform. The NFTs offered for auction include the following digital assets of Shri Amitabh Bachchan:

• Madhushala NFT Collection:
• Iconic Vintage Posters NFT :
• BigB Punk: These are digital images created keeping the Amitabhunique styles into consideration.

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. 453 of schedule III of Notification No.1/2017-Integrated Tax (Rate) dated 28.06.2017 which mentions that Goods which are not specified in Schedule I, II, IV, V or VI and falling under any chapter will attract 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 Notification No. 1/2017-CT(Rate) dated 28^th June 2017.  In case of services, authorities may demand tax , taxable @ 18% as per Notification 11/2017-CT(Rate) dated 28^th June 2017.

Conclusion

Based on the above, we would like to summarize our views as under:-

• Keeping in mind the recent proposed amendment under the Income Tax law, whereby NFT has been included in the definition of virtual digital assets, it can be safely concluded that intention of the legislature is to treat NFT as ‘Digital Assets for the purposes of the law.
• To fall under the purview of GST, NFT needs to qualify as goods/services. Where NFT qualifies as money or securities, same would be outside the ambit of the GST law.
• At the present, NFTs are not been recognised as a 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 definition of securities inter-alia includes derivative. In cases where the NFT is being sold as a speculative trading instrument, it will qualify as a derivative. Since NFTs are not currently recognised as derivate by SEBI in India, therefore NFT may not qualify as securities for the purposes of the law.
• It is now settled position of the law that the definition of “goods” is wide enough to include all kinds of 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 as goods.
• Since the scope of supply under the GST law inter-alia includes sale. Hence sale of non-fungible tokens can be treated as supply of goods and consequently. GST shall be leviable on such sale transaction. .
• 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 NFT qualifies as goods, in absence of any classification, authorities may demand GST @ 18%in terms of Sr. No. 453 of schedule III of Notification No. 1/2017-CT(Rate) dated 28^th June 2017.  In case of services, tax authorities may demand GST @ 18% as per Notification 11/2017-CT(Rate) dated 28^th June 2017. 

[1] Non-fungible token – Wikipedia <https://en.wikipedia.org/wiki/Non-fungible_token>

[2] Non-fungible token Definition & Meaning – Merriam-Webster <https://www.merriam-webster.com/dictionary/non-fungible%20token>

[3] 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>

This article has been written by Kapil Mahani, Chartered Accountant, founder of the Cretum Advisory based in Gurgaon, and Devang Bhasin, Advocate at Cretum Advisory.