What are NFT’S?
Before we delve into the definition let us first understand the meaning of the term Non-Fungible. What does it exactly mean? In simple terms the term non-fungible means non replaceable. Let me explain this with an example. For instance, the book Harry Potter and the Prisoner of Azkaban by J.K. Rowling must have millions of copies around the world and if you go purchase the book from either an online seller or a physical store there will be no difference between the two copies, which simply means that the book is replaceable. However, if one of these books has been read by J.K. Rowling and also has her signature and a few notes of wisdom, then the same book now will become unique, thus making it non-replaceable. This book is now only one of its kind and therefore, non-fungible.
NFT’S or Non-Fungible Tokens is a type of digital assets that exists on the blockchain. These digital works of art and other collectibles are one-of-a-kind, verifiable assets that can be easily traded on the blockchain. 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, the possibilities are endless.[1] A few popular examples of these are, Jack Dorsey’s first tweet sold for $2.9 million, a video clip of a LeBron James slam dunk sold for over $200,000 and a decade-old “Nyan Cat” GIF went for $600,000. Yes! you read that correctly, the hype behind these one-of-a-kind tokens has grown over the top, which has led investors, spending millions of dollars in these coins. The NFT market has seen rapid growth recently with its value tripling to $250 million in 2020. In the first three months of 2021 alone, more than $200 million were spent on NFTs. The economic momentum NFTs have in the crypto-market has exploded because of a trend towards digital collectibles. NFTs are also accelerating a larger trend of digital economic innovation as the public is increasingly favouring a crypto-economy.[2]
Well, you now may be wondering what is the Blockchain?
Blockchain Technology
Blockchain Technology is the technology that makes cryptocurrencies and NFT work as it is a digital ledger that records all of the transactions that have taken place between different parties.[3] This technological database contains evidence of transactions between users. The blockchain network is so rapid that it is impossible for a hacker to change the information contained on every single computer on the network in order to manipulate a transaction. This also brings us to the point of these transactions not being reversible. Once they have been made, they cannot be undone. This is what makes the blockchain special, while being a disadvantageous feature for certain users.[4]
One key feature of the blockchain is that since it is decentralized, meaning the control is with the users and no one else, which thus helps cut out the middlemen i.e., the banks. Let us understand this with an example. For instance, If Mr. Rohan wants to purchase a jacket and pays the amount in Bitcoin then the block chain will verify the balance and give the approval and, in this case, there is no involvement of any bank and the record will be public in block chain. It eliminates the middlemen i.e., Bank.[5]
Taxation on NFT’s
What every investor might be wondering is that how NFT related transactions will be taxed in India. Before moving any further first let us understand that there is no mention of the term ‘NFTs’ in any of the taxation laws in India. As of now there is no official framework to tax Crypto and NFT’s, however the government is soon expected to introduce the Cryptocurrency Bill which will clarify any further queries which the readers may have.
Now moving on to the question at hand which is how these transactions will be taxed. Well, the answer is not a straight forward one as the same transaction can be looked upon from different aspects vis-a-vis the following laws:
1. Income-tax Act, 1961
2. Central Goods and Services Tax Act (CGST), 2017 and other allied GST laws
3. Finance Act, 2016
Let us look at these aspects one by one.
Income Tax Act, 1961:
Section 54 of the Income-tax Act, 1961[6] is the charging section for income under the head ‘Capital Gains’. If a ‘capital asset’ has been transferred the income is treated under the head ‘Capital Gains’. While capital assets can include property of any kind, section 2(14)[7] has specifically included in its definition that any work of art will fall under this head. While NFT’s do have a broad spectrum, they are still treated as digital art and thus would rightly be taxed under this head.
If an NFT is treated as capital asset and is held for a period of more than 3 years and is thereafter sold to another person, then the seller will attract long term capital gain tax and needs to pay tax @ 20% with indexation benefit. If it was held for 3 years or less and then the seller will attract short term capital gain tax and applicable slab rates will apply.[8]
However, in the case of a person who has purchased an NFT, there is nothing much to be done on his part as he will simply be required to record the date of purchase and the value (preferably in INR) as on the date of such purchase so that he can claim the same as a cost acquisition at the time of subsequent sale.[9]
Central Goods and Services Tax Act (CGST), 2017:
It is highly likely that buying and selling of NFT’s will attract the GST. Section 9 of the Central Goods and Services Tax Act (CGST), 2017[10] imposes tax on the supply of goods and services. The exchange which facilitates buying and selling of NFT’s will be liable to pay 18% GST on every transaction, this charge however will most likely be passed on to the customer. So, a person who is involved in the business of creating and selling NFT’s will charge this residual rate from those who purchase his/her tokens.
However, the question which budges the most is that when a buyer purchases an NFT can he justify the Input Tax Credit (ITC) since Section 16 of the CGST Act allows claiming of ITC on only those inward supplies that are used in the course or furtherance of business[11]. For a customer to avail the ITC under this GST law the customer has to either be involved in the business of minting NFT’s or on the other hand show proof that the purchase of the NFT was a business expenditure. While both tasks, in my opinion are quite difficult, to treat is a business expenditure supersedes the other one as the burden of proof falls on the customer.
An important point worth noting is that if the aggregate turnover isn’t exceeding Rs. 20 lakhs in a financial year then the business doesn’t need to register under GST law.[12]
Finance Act, 2016:
Chapter VIII of the Finance Act, 2016 which was amended in 2020 now contains provisions related to charging of an ‘Equalisation Levy’. Section 165A of the Finance Act charges an equalization levy of 2% on the consideration received by an ‘e-commerce operator’ from ‘e-commerce supply or services’ made or provided or facilitated by it.[13] “E-commerce operator” is defined as “a non-resident who owns, maintains or controls a digital or electronic facility or platform for the online sale of goods or the online provision of services or both” and “e-commerce supply or services” has been defined to encompass any combination of the sale or facilitation of goods or services by an e-commerce operator.[14] So what this provision entails is that any non-resident who facilitates NFT Trade shall pay an equalization levy @2% for providing the facilities to trade to the resident Indians.[15]
Conclusion:
While this concept of buying and selling NFT’s is fairly novel and the situation in Indian as well as around the world will have to observed in the coming months. But as of now, governments around the world have yet to embrace the concept and take out laws for its regulation. It is certain that with the onset of time and the development of Web 3.0 which involves cryptocurrencies, metaverses and NFT’s this concept is likely to mature and each and every person will be involved in this highly lucrative economic opportunity.
REFERENCES:
[1] https://www.merriam-webster.com/dictionary/non-fungible%20token.
[2] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2022), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Jan 17, 2022).
[3] Ibid.
[4] Ibid.
[5] Taxguru LLP, NFT and its mechanism and taxation on NFT’s in India (2022) https://taxguru.in/income-tax/nft-mechanism-taxation-nfts-india.html (last visited Jan 17, 2022).
[6] Section 54 of the Income-tax Act, 1961
[7] Section 2(14) of the Income-tax Act, 1961
[8] Taxguru LLP, NFT and its mechanism and taxation on NFT’s in India (2022) https://taxguru.in/income-tax/nft-mechanism-taxation-nfts-india.html (last visited Jan 17, 2022).
[9] Tarish Vasant, Taxation on NFT Wazirx (2021), https://wazirx.com/blog/taxation-on-nft/ (last visited Jan 17 2022).
[10] Section 9 of the Central Goods and Services Tax Act (CGST), 2017
[11] Section 16 of the Central Goods and Services Tax Act (CGST), 2017
[12] The Central Goods and Services Tax Act (CGST), 2017
[13] Section 165A of the Finance Act, 2020
[14] Section 153(ca) and (cb), Finance Act, 2020
[15]Taxguru LLP, NFT and its mechanism and taxation on NFT’s in India (2022) https://taxguru.in/income-tax/nft-mechanism-taxation-nfts-india.html (last visited Jan 17, 2022).
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Great explanation ✋