Goods & Services Tax (GST) in IndiaDirect Tax Implications on Transactions within Metaverse

August 23, 20220


Taxes are mandatory levies on individuals or entities by the Government, to raise revenue for Government expenditures and for other purposes of the State. With the evolution of the digital world in wake of internet transformation, the system of taxation and taxability also needs to evolve with changing times.

The current tax laws were devised years ago based on the functionality of the conventional economy. However, with the advent of the digital economy, the present tax regime lacks consistency with the transforming technology.

Digital businesses are earning immense profits, but appropriate tax cannot be levied due to insufficient rules to commensurate tax laws to tax such profits. Hence, it is the need of the hour for all countries to devise and enhance tax laws, and make it at par with the ever-evolving digital economy.

The transformation of the digital and virtual world and the introduction of concepts like ‘Metaverse’ has revamped and added complexity to the system of taxation in the global economy.

Metaverse refers to a virtual realm or a parallel digital world which is an integrated network of three-dimensional virtual worlds, through which avatars of individuals situated across the globe would be present together virtually through enhanced technology.

In the virtual realm of the Metaverse, an individual has the freedom to do all the acts it did in real life setting, including shopping, watching movies, moving around, exploring, conducting meetings, etc. For the purposes of commerce, education, and entertainment, various companies have begun developing their Metaverse environments.

Metaverse encompasses the digital economy, with Blockchain playing an important role in its development. In this digital economy, entities would be able to sell goods, services, cryptocurrencies, tokens, Non-Fungible Tokens (“NFT”), and other Virtual Digital Assets (“VDA”), and all of these transactions would be validated with the help of Blockchain technology. This Blog shall briefly provide an overview of the possible income tax implications on the transactions and activities carried on through the virtual realms of the Metaverse.


Metaverse is a marketplace that combines Virtual Reality (“VR”), Blockchain, and NFT technology to create a virtual space. For instance, a virtual mall based on Blockchain networks in Metaverse allows the purchase of commercial space as virtual real estate and generates money by leasing, promoting, and improving it to provide visitors with an immersive experience using VR technology. The following incomes generated within Metaverse may attract income tax levies in the future:

1.  Income from Land in Metaverse

The land in Metaverse is measured in ‘tiles’, which is the smallest unit and cannot be broken down further. Each tile is non-fungible since it includes a distinct address (Block Id) and geolocation information in the form of Longitude/Latitude.

An item that is substitutable is fungible in nature. A good or commodity’s fungibility refers to its ability to be replaced by another identical one. Non-fungible, on the other hand, denotes originality and impossibility of replacement. Each tile in the Metaverse is sold as an NFT because each one may be distinguished from another in the Metaverse.

Within the Metaverse, for the conduct of events or to operate an online store, virtual land is required in the form of NFT. These virtual lands can be rented directly from owners or purchased from the market. A possible implication of such rental or purchase of virtual land is the levy of income tax on the transactions.

i. Rental Income

Under the Income Tax Act, 1961 (hereinafter referred to as the “IT Act”), rental income from residential property, shop, building or factory is subject to income tax under the head ‘Income from House Property’. Section 24A of the IT Act provides for a 30% standard deduction from rental income for the purpose of deducting expenses such as renovations and repairs.

As the land in Metaverse does not fall under ‘House Property’, rental income from such land cannot be subject to income tax as house property and would not entitled to a 30% standard deduction.

However, income from renting land other than House Property, i.e. the land on Metaverse, can be taxed under ‘Income from Other Sources’ under the IT Act. At the same time, rental income from Metaverse land may also be taxed under the head of ‘Income from Business. The land owners in Metaverse would be required to maintain the books of accounts and follow the audit requirements prescribed for such income under the IT Act.

ii. Sale of Land

a. Treatment as NFT

As the land is treated as NFT in Metaverse, such land would be subject to the income tax implications on VDAs if the Government notifies the land in Metaverse as a form of NFT or VDA. In such a situation, the income generated from the transfer of Metaverse land would be taxable at the rate of 30% under Section 115BBH(1)(a) of the IT Act, introduced by the Finance Act, 2022.

The cost of purchasing the VDA of virtual land, if any, would likely become the only direct or indirect expense that may be deducted from such income. Moreover, the loss incurred from the sale of virtual land cannot be offset against any other income.

At the same time, the Central Board of Direct Taxes (“CBDT”)  vide Circular No. 13 of 2022 dated 22.06.2022, requires the party that pays consideration on the transfer of VDAs to deduct Tax Deducted at Source ( “TDS”). Thus, the liability to deduct TDS would extend to the sale of virtual land, if it is covered under VDA. Hence, an Indian resident making payment for the transfer of a virtual land (if notified as VDA) would be required to deduct TDS at the rate of 1% of the consideration amount.

b. Treatment as Capital Asset

In case virtual land is not notified as a VDA by the Government, the income from the transfer of virtual land would be subject to tax under the head ‘Income from Capital Gains’, at the same rates as applicable in the case of the transfer of a typical capital asset.

When the virtual land is held for more than 36 months, it would be considered to be a long-term capital asset, and the income from its transfer would be subject to income tax at the rate of 20% after indexation of the acquisition cost. The short-term capital gains arising from the transfer of virtual land held for less than 36 months would be taxed at the applicable rate of tax as per the taxpayer’s tax bracket.

2. Income from running a Business in Metaverse

The income earned from operating an online store in the Metaverse will be subject to taxation under the head ‘Business Income’. All costs incurred entirely and solely in connection with this business may be deducted by the taxpayer. Similarly, if an Indian resident person holds an event in Metaverse, the income can be either taxed as Business Income or Income from Other Sources.


Despite the prevalent challenge within the Metaverse being the complete lack of physical existence, its complex structure might have the key to effective solution for taxation of transactions within the Metaverse.

On one hand, Metaverse might be a decentralised, loosely governed, and essentially anonymous space, and on the other hand, blockchain technology allows users to “watch” and monitor transactions as they happen on distributed ledger networks in real-time. As a result, real-time tax reporting engines can be constructed on top of blockchain transactions. These engines would eliminate the traditional reporting procedure by instantly sharing transaction information with tax authorities.

The Metaverse and the Web3 technology that underpins it could present serious tax issues. However, they also inculcate the possibility to equip tax professionals with innovative new tools, making it simpler to collect the appropriate taxes at the appropriate events, in a way that is both efficient and economical for all parties.


Metaverse is the newly emerging technological phenomenon, that the world has to keep up with. The Web3 stage of the Internet’s growth has rapidly risen as the embodiment of economic tokenization, taking shape through Metaverse. It promises a continuous expansion with new business models and ways of value generation.

In its nascent stage, Metaverse revolves around multiple hurdles but still continues to exist and evolve with each coming day. It is the need of the hour for global representatives to come together and agree upon a consistent tax framework for activities emerging within Metaverse involving VDAs such as cryptocurrencies, cryptographic tokens, NFTs, virtual land, and so on.

Although the Government of India has taken proactive measures for the taxation of VDAs, it yet remains to be determined whether the activities within Metaverse such as the sale or rental of virtual land, hosting of events, e-commerce, etc., would be subject to the same stringent income tax implications which are presently being levied on the CBDT notified VDAs.

– Team AMLEGALS, assisted by Mr. Rishav Kumar (Intern)

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