Tax considerations around the emerging digital world and the metaverse

by Bhavesh Jindal

Decentralised blockchain transactions have gained worldwide traction especially in the post-pandemic era. However, the global economy is still coping with the challenges of the existing digital world (Web 2.0), which led to introduction of concepts like significant economic presence and minimum global tax to collect tax in a source jurisdiction where companies operated digitally without any physical presence. The trend of offbeat technological frontiers has now raised the question of how to manage an entire parallel universe (a.k.a. the metaverse). A more humanised version of internet applications, the metaverse will provide spatial experiences comparable to those in the real world by enabling decentralised interactions between users.

The metaverse as technology has been adapted mostly by industries like media, entertainment, commerce, gaming, tourism, education, and real estate. The key question that arises from a tax perspective is that whether income from transactions in the metaverse will be taxable in the real world. Furthermore, what should be the trigger point of taxing a given transaction, identifying the economy that should have jurisdiction over taxability, recovering tax on the given transaction, and determining valuation.

India, in its 2021-2022 fiscal budget, introduced the taxation of existing blockchain-based technologies including crypto and NFTs as Virtual Digital Assets. In a strong effort, India has tried to cover the existing infrastructure by making an exhaustive definition while leaving some room for legal principle of ejusdem generis to include metaverse real estate transactions within the government’s purview, the value of which is expected to surpass USD 1 Billion this year. These will be taxed at a higher rate of 30% plus surcharge and cess under section 115BBH of the India Tax Law.

Ideally, the primary focus at this juncture should not be on the levy and collection of tax, but perhaps, navigating how to govern the metaverse’s underlying framework and encouraging worldwide acceptance. Needless to say, the taxation of transactions in the metaverse requires GGI members as a forum to come together and collaborate on extensive research on this subject, as we cannot rule out the possibility that our next global event will be conducted in the metaverse.

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International Taxation India Ashwani & Associates