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The 1 percent tax deducted at source (TDS) applicable to virtual digital assets (VDAs) that came into effect from July 1 is impacting trading volumes of digital collectibles popularly known as NFTs (non-fungible tokens).
NFTs in India picked up pace last year with many film stars, sportspersons, singers and other celebrities launching collections of their own digital assets. One of the biggest NFT collections in terms of sales was of Bollywood actor Amitabh Bachchan that was auctioned for over Rs 7 crore last year.
But it looks like the NFT craze is seeing a slowdown due to the new levy coming into play.
Tax troubles
“Throughout the industry, the volumes are down by 70 percent. This (TDS) will have a significant negative impact on the growth in popularity of NFTs,” said Pratik Gauri, founder and CEO, 5ire, a blockchain network.
TDS on VDAs entails mandatory deduction by the buyer of 1 percent of the amount payable to sellers of digital assets when the transaction amount exceeds Rs 10,000.
“For example, an NFT is sold for $100. All NFTs are charged an artist’s fee of 5 percent and services fees (including goods and services tax) of 2.95 percent. This way, the net sales amount of the NFT token will come to $92.05 after all the deductions. The new 1 percent TDS will be applied solely to the net sale amount, which works out to be $0.92 (1 percent of $92.05). After the application of the TDS, the actual amount deposited would be $91.13,” explained Gauri.
He added that both buyers and sellers have turned cautious and are discouraged by the application of the TDS, which was announced by Finance Minister Nirmala Sitharaman in this year’s budget.
“The new taxation is providing a major hindrance for investors as well as innovators in the industry,” said Taaran Chanana, managing director and co-founder, MemeChat, a meme creator app. The company earlier this year had launched an NFT marketplace called Meme Club NFT.
Challenges ahead
“One of the biggest challenges we will face is the handling of the price increase of our assets,” said Kameshwaran Elangovan, co-founder and chief operating officer at GuardianLink, which bills itself as a ‘no-code NFT platform’.
Arijit Mukherjee, founder of the Singapore-based company Yunometa - NFT & Metaverse marketplace, as it describes itself, said that the main challenge is to figure out how to take the additional tax into account at a time when the industry has been going through a slowdown. “NFT marketplaces will have to relook at their balance sheets to find ways to mitigate the new tax rule,” he added.
There is another concern: How will NFT marketplaces facilitate TDS deduction, asked Om Malviya, president, Tezos India, an organisation building block chain ecosystem. “There are two types of NFT platforms, a centralised marketplace and a decentralised marketplace,” he said. “For centralised NFT marketplaces like WazirX, it’s clear that the platform has to manage the TDS deduction. But in the case of decentralised NFT marketplaces, it’s not clear who’s going to make the deduction process for TDS.”
Malviya added that decentralised marketplaces are smart contracts which once deployed do not allow any changes to be made. Smart contract refers to a programming that exists in blockchain which is used to implement a sale agreement between the owner and buyer of an NFT.
“This (decentralised marketplaces) is where the majority of NFT trading happens and I don’t see a way how someone can make their platform compliant in the way that taxes and TDS are being incorporated when the smart contracts have already been deployed,” he added.
User education a big task
NFT exchanges also think that making users aware of the new regime will be a herculean task.
“Educating NFT creators and buyers about the new tax will also be a challenge, mainly because the TDS rules apply differently to both,” said Yunometa’s Mukherjee.
Buyers in India who transact in cryptocurrency to buy VDAs will be charged 1 percent TDS on the transaction amount. Sellers in India who transact either in cryptocurrency or in fiat currency (government-issued currency) to earn from selling their VDAs will be charged 1 percent TDS on the transaction amount, said NFT marketplace Jump.trade on its website.
GuardianLink’s Elangovan said that many investors in the NFT space belong to the new-age spectrum and they might not be completely aware of all the aspects of investing, including the new tax.
Mukherjee thinks that the new tax will slow the growth momentum NFTs were seeing in India so far but over a period of time, it will become part of the overall NFT buying and selling process.
Boosting investor confidence
“Yes, taxation on income from sale of virtual assets will result in a slowdown of a sector that was growing rather rapidly. But it is also expected to boost investor confidence,” said Chanana.
Elangovan said that the legal solidity of this asset class has intensified.
“After the new rules and guidelines are imposed, the system is getting stronger and more aware of the space. NFTs will now see a steady flow of investment from traditional investors,” he said.
He added that NFTs will reach more eyeballs because of the news it has made through this TDS. “We think it’s more difficult to educate people regarding NFTs than the 1 percent TDS,” said Elangovan.
Tapan Sangal, founder and chief evangelist of P2E Pro, a technology company, thinks that buyers of genuine NFTs attached to creations of artistes and craftsmen as well as NFTs linked to real-world products and services will not be worried about the TDS. “The growth momentum will only pick up from here with genuine buyers of genuine NFTs entering the market,” he said.
Tezos India’s Malviya pointed out that in India, there’s no NFT as such which is not backed by any tangible physical asset. “We see people going for assets which are backed by physical entities resonating with the respective NFT, like themed merchandise. If platforms make the case that NFTs don’t fit in this category which makes NFTs VDA, this would help the brands to shield the growth momentum of the same,” he said.
The Central Board of Direct Taxes (CBDT) recently clarified that if a sale of NFT includes tangible assets, it would not be considered as VDA for taxation.
Malviya noted that the NFT market in India is still at a nascent stage and the majority of the growth that it is seeing is small artists minting their artwork as NFTs. “So I don’t think it (TDS) is going to impact on a level where people will stop experimenting with NFTs,” he said.
