The idea of a parallel virtual world has intrigued minds since several decades. The advent of the metaverse has created such possibility into a reality, resulting in significant benefits for users and business entities alike. The metaverse is an enabler for users from different parts of the world to engage in gaming, entertainment, social and business-related activities through a virtual medium in a digitally parallel world leading to creation of wealth, opportunities and recreational value. Since several transactions take place on a recurrent basis in the metaverse, the scope for Governments to tax such transactions also have immense potential. However, it is necessary that the methods and medium of tax do not deter the development of the metaverse in any manner.
Similar to jurisdictions across the world, metaverse adopters in India have continuously been on the rise, consequently resulting in the increase in taxable transactions. However, the opportunity to tax has been undermined because of the absence of an effective mechanism to levy and collect such tax on metaverse transactions. With effect from 01st July 2017, a unified indirect tax system known as the Goods and Services Tax was implemented. Till date, several difficulties and ambiguities exist in the levy and collection of Goods and Services Tax on metaverse transactions and therefore, the present article is aimed at identifying concerns and addressing them with the goal of proposing more clarity in respect of Goods and Services Tax on Metaverse transactions in India.
Understanding the Metaverse
As evident from Figure 1 above, the Metaverse is a virtual world, parallel to the real world wherein users interact by way of digital avatars created by them. Depending upon use cases, the users may immerse in the Metaverse by using virtual reality in order to enhance their experience. There are tremendous use cases and the most prominent ones which have been seen so far are gaming, entertainment uses, advertisement of products, a host of virtual economic activities using cryptocurrencies or barters of non- fungible tokens, purchase and sale of assets in the Metaverse, content creation leading to the development of the Metaverse itself, conduct of social, collaborative and virtual events and planning, designing and testing activities in the Metaverse for potential products which may be offered in the real world. The list exponentially continues to grow recurrently, and it may not be surprising to see full- fledged livelihoods being supported by the numerous potentials of the Metaverse in the near future.
From the Indian perspective, there is increasing interest and adoption of the Metaverse amongst Indian users. Data suggests that more than 5 lakh Indian users have shown interest in being a part of Metaverse projects up till the end of last year, making it fifth (5th) in the world in rankings of user interest in Metaverse projects. Due to the immense potential and possibilities of Metaverse in India, it is necessary for legal challenges to be addressed. Although legal challenges emanating from the Metaverse will span several specializations of law, this article is strictly focused on Goods and Services Tax (India’s indirect tax system) on Metaverse transactions.
Basic Outline and Structure of the Goods and Services Tax Law in India
Figure 2 above showcases that several statutes and rules emanating from such statutes are a part of the Goods and Services Tax law in India. The Central Goods and Services Tax Act, 2017 and the State Goods and Services Tax Act, 2017 concurrently apply to intra- state transactions, i.e., within the boundaries of the State itself. The State Goods and Services Tax statutes are in the names of the respective States such as the Madhya Pradesh Goods and Services Tax Act, 2017, Maharashtra Goods and Services Tax Act, 2017 and so on. Similarly, where business transactions are carried out within a Union Territory then the Central Goods and Services Tax Act, 2017 and the Union Territory Goods and Services Tax Act, 2017 have concurrent application. The concurrent application of these laws is a manifestation of co-operative federalism between the Centre and the States which is imbibed in the Goods and Services Tax law. The Central, State and Union Territory laws have delegated legislation in the form of the Central Goods and Services Tax Rules, 2017, State Goods and Services Tax Rules, 2017 and the Union Territory Goods and Services Tax Rules, 2017 emanating from the parent statute.
In inter- state transactions, imports and exports, the Integrated Goods and Services Tax Act, 2017 and its delegated legislation, the Integrated Goods and Services Tax Rules, 2017 are applicable. The Goods and Services Tax Settlement of Funds Rules, 2017 conjointly emanate from the Central Goods and Services Tax Act, 2017, Union Territory Goods and Services Tax Act, 2017 and the Integrated Goods and Services Tax Act, 2017 prescribing reporting and compliance standards for the Government in order to ensure effective distribution of Goods and Services Tax Revenue as per the scheme and mechanism envisaged under the law. The Goods and Services Tax (Compensation to States) Act, 2017 and its respective delegated legislations such as the Goods and Services Tax Compensation Cess Rules, 2017 and Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2017 explicate the levy of Cess on the amount of Goods and Services Tax on luxurious goods and demerit goods with the purposes of compensating the State Governments for the losses incurred by them on account of the change in indirect tax system in India.
Under the scheme of the Goods and Services Tax law in India, the subject matter of tax is “supply” which can include supply of goods, supply of services or supply of both goods and services in mixed or composite form. For the purposes of classification of goods, alignment is made to the First Schedule of the Customs Tariff Act, 1975 which in turn is aligned with the Harmonized Commodity Description and Coding System (referred to as the Harmonised System of Nomenclature or HSN in common parlance). For the classification of services, the Central Board of Indirect Taxes & Customs has devised the Services Accounting Code (SAC) which is based on the United Nations Central Product Classification. As far as the rates of Goods and Services Tax and exemptions are concerned, they are prescribed by way of Notifications for both goods as well as services. Principally, the rates of Goods and Services Tax as prescribed in the Notification are 0.25%, 3%, 5%, 12%, 18% and 28%.
Determining and Identifying Nature of Transaction and Charge of Goods and Services Tax
The first and foremost challenge which will have to be addressed and solved in respect of Metaverse transactions would be to determine their nature as either goods or services. Before moving forward, it is necessary to explicate that in order to avoid multiplicity in provisions, the provisions of the Central Goods and Services Tax Act, 2017 have been adopted by the State, Union Territory and Integrated Goods and Services Tax legislations and therefore, the definitions of the Central law would apply to all other Goods and Services Tax statutes as well. The term ‘goods’ has been defined under Section 2(52) of the Central Goods and Services Tax Act, 2017 to include all movable property including actionable claims and things attached or forming part of land but excludes money and securities. The term ‘services’ has been defined under Section 2(102) as anything other than goods, money or securities and has included activities related to either use or conversion of money. Under the Goods and Services Tax system, digital goods are treated as services by way of legal fiction through powers conferred under Section 7(3) of the Central Goods and Services Tax Act, 2017. In furtherance of this, the concept of ‘online information database access and retrieval services’ was envisaged, and the supply of digital goods has been subjected to the ‘services treatment’ for the purposes of levy and collection of Goods and Services Tax. Therefore, the nature of Metaverse transactions irrespective of whether digital goods or digital services are being provided, would be treated as “service” for the purposes of levy and collection of Goods and Services Tax as online information database access and retrieval services. To illustrate, irrespective of whether a Metaverse user sells virtual property or hosts an event for which consideration is collected, it would still be treated as a “service” by way of legal fiction.
The second challenge which will have to be addressed and solved is identifying if Goods and Services Tax has to be paid on forward charge or reverse charge basis on Metaverse transactions. For this, it is necessary to first understand the scope of online information database access and retrieval services which is explicated by way of the table below.
ONLINE INFORMATION DATABASE ACCESS AND RETRIEVAL SERVICES (Section 2(17) of the Integrated Goods and Services Tax Act, 2017)
Advertising on the internet.
Providing cloud services.
Provision of e- books, movies, music, software and other intangibles through telecommunication networks or internet.
Providing data or information, retrievable or otherwise, to any person in electronic form through a computer network.
Online supplies of digital content (movies, television shows, music and the like).
Digital data storage.
The aforesaid table showcases the scope of online information database access and retrieval services as provided under Section 2(17) of the Integrated Goods and Services Tax Act, 2017. Transactions in the Metaverse would also be covered under its ambit since the indicative list of online information database access and retrieval services is an inclusive and detailed list capable of covering activities of the Metaverse. Coming to the issue of forward charge or reverse charge, the figure below demonstrates the different scenarios and links it with the forward or reverse charge payment postulated under the scheme of the Goods and Services Tax law.
Figure 4 above envisages five scenarios. First is where the supplier of service as well as the recipient of service in a Metaverse transaction are located within India. In such instance, the Goods and Services Tax will have to be paid under forward charge. This means that the supplier of service will collect the applicable tax amount from the recipient of service along with the consideration amount and pay it in the Government Treasury. The second scenario is where the supplier is located outside India and the recipient of the service is located in India having valid Goods and Services Tax registration. Under such circumstances, Goods and Services Tax will have to be paid under reverse charge. This means that the supplier cannot collect any Goods and Services Tax amount from the recipient and the recipient itself will self- assess and deposit the applicable Goods and Services Tax in the Government Treasury. The third scenario is where the supplier is located outside India and the recipient is located in India, but being an end consumer is not registered under the Goods and Services Tax law. Under such circumstances, the supplier will have to deposit Goods and Services Tax on a forward charge basis even though it is located outside the taxable territory. For this purpose, the concept of non- residential taxable person has been stipulated under the Goods and Services Tax law. The fourth scenario is where in the Metaverse transaction, the supplier is located in India but the recipient is located outside India. In this transaction, Goods and Services Tax will have to be paid on forward charge basis and the supplier will pay the Goods and Services Tax amount after collecting the said amount along with consideration from the recipient of service who is located outside India. The fifth scenario is where both, the supplier as well as the recipient of service are located outside India and thus, Goods and Services Tax is not leviable.
Classification of Metaverse Transactions under GST
Since the nature and liability of tax in Metaverse transactions have been discussed, it is necessary to now address classification of such transactions. The Tariff Heading where Metaverse transactions can be classified is Heading 99.84.39 which reads as, “Other on-line contents nowhere else classified” and the rate of tax applicable is 18%. This is because any transaction which occurs in the Metaverse would be nothing but transfer of data over the medium of internet and such transfer of data over the medium of internet would be treated as “online content” for the purposes of Goods and Services Tax. For example, if a user decides to build a house in the Metaverse or purchase a car in the Metaverse then it would, in the core sense be transfer of data over the medium of internet classifying it as online content being supplied as online information database access retrieval services for the purposes of levy and collection of Goods and Services Tax.
Valuation of Metaverse Transactions under GST
The next challenge which requires to be addressed is valuation under the Goods and Services Tax of Metaverse transactions. Section 15 of the Central Goods and Services Tax Act, 2017 read with Rules 27 to 35 of the Central Goods and Services Tax Rules, 2017 stipulate the valuation provisions. When payment for a Metaverse transaction is made in Indian currency, then there would not arise any problems since the general valuation provision under Section 15(1) of the Central Goods and Services Tax Act, 2017 which states that the transaction value would be the price actually paid or payable and Goods and Services Tax at the rate of 18% would be attracted on such price. However, payments in the Metaverse are also being made in cryptocurrencies which are not recognized as legal tender in India and thus, will constitute as barter. The scope of supply as envisaged under Section 7 of the Central Goods and Services Tax Act, 2017 embraces barter transactions and therefore, levy and collection of Goods and Services Tax have to be made on barter transactions as well. For cryptocurrencies, it is a challenge from the Indian context to conduct valuation for the purposes of Goods and Services Tax. Rule 27 read with Section 15(4) would become applicable in such instance and the open market value of the supply will determine the value of supply. This means that in case payment is made in cryptocurrency in a Metaverse transaction, then the market value of the cryptocurrency on the date on which payment is received by the supplier (as per time of supply provision under Section 13 of the Central Goods and Services Tax Act, 2017) would become the value and Goods and Services Tax at the rate of 18% will have to be paid on such transaction.
In view of the discussions undertaken in the present article, it is quite clear that several challenges exist for taxpayers and tax administration alike in levying and collecting Goods and Services Tax and it is necessary for such challenges to be taken up during the Goods and Services Tax Council Meetings and consequent mechanism to be created in order for there to be better clarity in respect of levy and collection of Goods and Services Tax on Metaverse transactions.