Metaverse – Are the Indian Laws Ready?


Adarsh Somani, Partner–
Sonam Bhandari, Principal Associate–

In just over three decades of the world wide web’s existence, over half of the world is now online; with the recent pandemic only augmenting it multifold.  With the first generation of the web mostly being a passive “read-only” web (based on information) and Web 2.0, being a “read-write” web (based on social networks, wikis and blogs), a major shift in tax policies was not direly warranted. The essential reason for this being, that the underlying activity continued to serve as a license (of data, information, software, algorithms, etc.) – which most tax policies view as a service. With online data/information business growing manifold, the Indian indirect tax laws were maneuvered to include these transactions in the fiscal revenue realm through prescription of specific provisions for “online information and database access or retrieval services”. Most global B2C online licensing transactions purchased in India, were set down as taxable under the indirect tax laws with administrative/adjudication control on global suppliers of such services also manifested with the Indian tax authorities.

A paradigm shift in indirect tax laws was not warranted as most transfers on web only included temporary transfers and not “ownership” per se. However, a recasting may be imperative with the next generation of world wide web – Web 3.0 or Metaverse. Although metaverse, as imagined in its true essence, is yet to take complete shape, technological foundations such as blockchain and crypto assets are steadily being developed, setting the stage for the digital space becoming increasingly  real with augmented reality.  In Mark Zuckerberg’s words, we would soon experience the internet that one is inside rather than just looking at. In the metaverse era, nonfungible tokens (NFT) could be owned and swapped. For the uninitiated, NFTs operate like cryptographic tokens, but unlike crypto currencies are not mutually interchangeable. Each NFT may represent a different underlying asset and thus have a different value. In summary, one would be able to purchase physical-world items in the metaverse and “hold/“own” 3D models of what they’ve shopped for, own piece of art or music, to which no one else could claim ownership of.

With the arrival of Magicverse (Metaverse) imminent, it is important for Governments to translate laws and regulations to make this age more competitive, innovative and equitable to the conventional physical age. Some important concepts may need a re-alignment and rethink for the digital age. With a redefinition of “ownership” in Web 3.0, it is imperative to analyze whether digital goods should continue to be treated as “services” under the GST law. Currently, no customs duty is leviable on import of intangibles into India unless recorded on a media. GST is leviable on most digital supplies as supply of services, where either GST is payable by the supplier of services/recipient of services, as the case may be. The essential reason linked to intangibles being perceived as “supply of services” is that currently most digital transfers operate on a license model. Most digital creations currently include a temporary licensing with currently blockchain not allowing owning of digital goods. Hence, current stipulations of no levying customs duty on such movement of intangibles and most of these triggering a standard rate of GST at 18% (as supply of services), fit well with the Government’s laid objective on taxing such supplies.

However, with technology maturing and the shift from temporary transfer to ownership of digital goods, various alignments in the law are imperative. To illustrate, say, a 3D digital car is purchased by an Indian customer from someone in New Jersey, U.S, in the current framework, it may be difficult to tax such transactions in India. As there would be no physical movement of goods, there exists no mechanism for levy/ collection of duty under the Customs Act and hence, customs duty would not be payable on such transactions. This principle already having been upheld by India’s Apex Court in the case of Commissioner Vs Oracle India Pvt Ltd [2016 (342) ELT A40]. The current framework of the GST law links “goods” to movable property with no explicit definition of “movable property” being prescribed.  As movable property could be tangible/intangible and where the said position is accepted, these transactions may remain untaxed under the GST law as well. This is because transactions of import of goods are to be administered under the Customs Act. While currently the volume of such transactions may be miniscule/negligible, increasing volumes and inclination of the millennials and Gen Z would engender a relook at conventional definitions and provisions of indirect tax laws to clip dents in fiscal revenue.

Another example to the above quandary is taxability of events. Currently, GST on global events is taxed basis the place where the event is actually held. Events held outside India do not trigger a GST levy; with neither the supplier nor the recipient being liable to discharge GST. With the digital revolution unfolding and anticipations of virtual reality becoming the preferred choice, more and more of entertainment, artistic, musical and similar events are expected to be held virtually.  Unless explicitly clarified, determination of location of such events would be obscure including possibilities like location being determined basis hosting location, key performers’ location (which could also be multiple locations for a large scale event), etc.

The virtual space is being designed to also facilitate buying and selling of real estate in the virtual world. With taxation of immovable property being conventionally determined basic actual location of property including stamp duty, GST on services liked to immovable property, etc., a relook at the concept of “immovable property” may be inevitable – as space in the virtual world may also have boundaries and ownership. Similar issues, as above, would also be relevant for domestic transactions (given the federal structure) including time of supply, rate of tax, etc.

The above illustrations are only a trailer to the multitude of apprehensions, dilemmas and disarrays that would crop up in the new era of Internet 3.0. This would be further stressed with the apprehensions on taxability of cryptocurrency tokens/ wallet, which would be the major tender for most transactions in the virtual world. With it not being a legal tender currently under Indian laws or securities, the GST position on transaction in cryptocurrency tokens also remains a vexed one; with various revenue investigations already being underway.

With this new iteration of internet already gaining traction, it is imperative for policy makers and businesses to relook at conventional legal provisions for taxing such transactions. It would be interesting to see the new challenges and also the new opportunities that the next big thing – metaverse would unleash.