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Non Fungible Token: Legal Standing On Copyright And Taxation

The term NFT stands for "non-fungible token". NFTs is basically digitalised asset which epitomize original works as stated under section 2(y) of the Copyright Act, 1957[1] and hereafter mentioned as "Work/s" such as music, painting, meme etc. in a digital form. There is really no restraint on what physical commodities or assets can be transformed and sold as an NFT.

NFT is unchangeable and different and can't be replaced or divided. NFTs are braced by meta data and algorithm, which are inclined to set it separately from other alike NFTs already in existence. If someone owns an NFT, then the person is likely to be the only person globally with that unique token on the blockchain.

Copyright and Protection

NFTs are not likely to enjoy copyright as they just represent certain work on the blockchain technology. This will not classify as derivative works or original works under intellectual property laws whereas the works on which a NFTs are formed will relish copyright protections. The right in such Works are seized by the assignee/author, as stated below. The ownership of the copyright in the Works delivers the exclusive right to the owners as stated in section 14 of the Copyright Act, 1957[2].

This includes the rights to mint the NFTs of the Work. The owners of the copyright in the Works can transfers the whole copyright in the Works to an individual by assignments or provide the individual with convinced right over the Works such as the rights to mint the NFTs by mode of a license. For minting an NFT, one must own the rights of communication of the Work and imitation of the Work to the public. Without such rights, minting a NFT of the Works will lead to a breach of copyright[3].

NFTs derives their worth from the Works which they denote. However, the market force such as demands and the hype formed for some particular NFTs eventually determines the worth of such NFT. As already stated hereinabove, when an NFT is bought, the purchaser is actually purchasing the metadata in the Works and not obtaining the underlying Works allied with the NFTs or its associated right. When NFT is bought, the purchasers become the owner of the NFT and a non-exclusive license is granted to present the NFT in their e-wallet. However, the extent of these rights is for personal uses only and the purchaser cannot commercialize on these rights by showing Works in any third-party websites.[4]

Most of the sales of the NFTs do not generally involve transmission of copyright, but there are cases wherein the sellers offer to turn the token into an actual transmission of copyright ownership of the original Works, thereby transferring all the copyright in the artistic work as stated under section 14(c) of the Copyright Act, 1957[5].

Such transmission of right should be set out in the terms and condition or in a separate license/assignment agreement between the NFT sellers and buyers. The buyer's usage of the underlying Works can sometime be with the minimal restrictions. However, seeing the nature of right attached to an NFT, it is tremendously restrictive depending on what the owners of the right choose to sell.

The difficulties under Indian laws is that even if seller wants to assign the copyright in the underlying Works of the NFT to the purchaser via a smart contract, it is not permitted as Section 19(1) of Copyright Act, 1957[6] evidently mentions, "No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent."

Therefore, in order of the transmission of the copyright in the underlying Works of an NFT, the party must have a fully effective license agreement or assignment yielding the purchaser either the copyrights in the Works or certain rights over the NFT.[7]

At every single stage of transfer or sale of the NFT, unless the purchaser has attained the copyright to the NFT through a written agreement from the seller (assuming the seller owns the copyright to the NFT), the purchaser does not acquires the right to exploit the NFT through any means he want such as exhibiting or merchandising photo of the NFT for commercial purposes.[8]

An alternate policy suggestion is that a new code should be formed for Blockchain which would not only solve the issue of NFT's but would also cover other socio-legal aspects such as Tax, Merger & Acquisition. This idea is taken from the Insolvency and Bankruptcy Code, 2016 as it is an additional law to company law, tax law, mergers & acquisitions and competition law in India but isn't a full-fledged law.

Taxation

Purchasing of NFTs forms a taxable event when they are generally bought using cryptocurrency whereas when the NFT's are bought using fiat money, then it creates taxable events only when the NFT's are sold. Under section 1(a)(9) of the Commodities Exchange Act (CEA), most non fungible tokens are possibly stated as commodities. As a collectible, NFTs are subjected to long-term or short-term capital gain tax.[9]

One of the most prevalent usages of NFT is artwork and even India has engaged to its markets quite well. In this scenario, if sellers are registered suppliers under the Central Goods and Service Tax Act, 2017[10], then the sale of these NFT's are considered as supply of good and will be eligible to CGST. Under Section 2 (52) of the CGST Act[11].

If the asset is an artwork, then it falls under the definition of goods and consequently sale of these goods will be classified as "supply" as per section 7 of the same Act. As now stated by apex court in several cases that "goods" under this Act can be classified as tangible or intangible property, so intangible nature of NFT's should not be considered for not including it in the definition of "goods". Also, individual who is unregistered in term of the regulations subjected to the CGST Act[12], will be able to sell the artwork as NFT and in these scenarios the transaction will not be subjected to CGST.[13]

Conclusion
There are no laws to explicitly control the NFTs market space and therefore, there occurs a lot of ambiguity with regard to the right relished by NFT's owner and the degree to which they can exploit the NFT which they buy. If there is a method for smart contract to be easily understood by the purchaser of the NFT in order to understand the agreement contained in them, then it would significantly decrease the risk of infringing upon another's copyrights by explicitly putting down the space of use of the NFT. Further, standard terms and condition must be recognized to guarantee that the terms of usage of the NFTs are put out in an explicit manner.

Open issues and the way forward, NFTs are progressively becoming a globally recognized development in the arena of blockchain technologies and individual as well as companies are gradually trading in the same. With acceptance of NFTS, regulatory bodies are also captivating this up for planning. There are no restricted laws for the NFTs.

To regulate any infringements, there must be a formation of global accord or protocols in the near future. There must be a lawful outline globally which enforces all the rights and obligations of the buyer and original creators.

End-Notes:
  1. The Copyrights Act, 1957, S2, No. 14, Acts of Parliament, 1957 (India)
  2. Id.
  3. Bianca Lessard, NFTs, Minting and Copyright: what you should know as an artist, RENNO&CO, https://www.rennoco.com/post/nfts-minting-and-copyright-what-you-should-know-as-an- artist,
  4. Farah Muqaddam, NFTs and Intellectual Property Rights, NORTON ROSE FULBRIGHT (2021),, https://www.nortonrosefulbright.com/en/knowledge/publications/1a1abb9f/nfts-andintellectual-property-rights,
  5. The Copyrights Act, 1957, S14, No.14, Acts of Parliament, 1957 (India)
  6. The Copyrights Act, 1957, S17, No.14, Acts of Parliament, 1957 (India)
  7. Medhansh Kumar, Million Dollar Meme: Non-Fungible Tokens and their Regulation, SCC ONLINE BLOG, OP EDS OP. ED., (2022, https://www.scconline.com/blog/post/2022/01/12/non-fungible-tokens-and-their-regulation/
  8. Ross Chalmers, Footprint: Do You Own Copyright While Buying an NFT?, YAHOO FINANCE (2021), https://finance.yahoo.com/news/footprint-own-copyright-buying-nft,
  9. Utkarsh raj and Vaibhav Kashyap, Legal Implications of Non-Fungible Tokens in India 2021 SCC Online Blog OpEd 175, http://www.scconline.com.eu1.proxy.openathens.net/DocumentLink/VsjqkKuF, 14-07-2022
  10. The Central Goods and Service Tax Act, 2017. No.12, Acts of Parliament (India)
  11. Id.
  12. supra note 10.
  13. Mahwash Fatima* and Lakshmi Ratna Kancherla, Non-Fungible Tokens ,Implications under GST Decoded, 2022 SCC OnLine Blog OpEd, http://www.scconline.com.eu1.proxy.openathens.net/DocumentLink/jJ548F1i,

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