Is NFT Legal In India?

The emergence of Non-Fungible Tokens (NFTs) has brought about a worldwide upheaval in the domain of digital ownership, India included. However, the strict shackles in which NFTs are legally constrained in India are much too difficult and complex to traverse. This blog intends to demystify the legal status of NFTs in India by covering applicable laws, taxability, regulatory issues, and future outlook.

What Is An NFT?

An NFT is a unique digital artifact that fortifies the ownership of some real-world item or digital asset. Conversely, cryptocurrencies are fungible, while NFTs are non-fungible tokens, meaning that each token is different and cannot be replicated. The digital format is composed of blockchain technology that secures a transparent record of ownership. The ownership value and uniqueness make assets unique and precious.

Legal Status Of NFTs In India

India has yet to put legislation in place for all intents and purposes governing non-fungible tokens (NFTs). However, specific regulations prohibit cryptocurrencies in the country, making it illegal to mine, generate, hold, or sell cryptocurrencies within Indian territory.

There is less visibility on the legal standing of cryptocurrencies, digital currencies, and NFTs in India. However, with the increasing prevalence of NFTs and cryptocurrencies, it is such a case that regulations are warranted in a conducive manner. The questionable environmental effect of NFTs is one more area to watch for.

RBI's Stance On Digital Currencies

The bill on cryptocurrency regulations defines it as a token or number that does not fall under digital currency and that may carry the peril of financial loss. Conversely, the digital rupee issued by the Reserve Bank of India (RBI) has been granted valid recognition by the Indian government. The draft proposes a legal status for virtual and digital currencies which expressively lays down that dealing in such digital currencies is illegal and may attract a penalty of imprisonment of up to 10 years. The RBI has also issued a public notice prohibiting all transactions in digital currencies.

Petition Against RBI Authority

The Internet and Mobile Association of India, through its petition, argued that virtual currencies and cryptocurrencies should not come under the unilateral authority of RBI. The Supreme Court, on this matter, proclaimed that even though RBI is critical in the national economy, it must prove the harm being caused by NFTs so as to ban trading.

Classification As Per SCRA

NFTs do not fit within any particular category under the Securities Contract Regulation Act, which hence means that no specific regulations or prohibitions exist with regard to NFTs. The foundational Copyright Act of India maintains that a written contract must be present for establishing copyright ownership over the NFT, thereby granting the copyright owner the legal right to reproduce and issue copies and some protection against illicit copying.

Applicable Indian Laws

While no specific NFT law exists, several existing laws provide a framework for understanding the legal aspects:

Information Technology Act, 2000

This act establishes a legal infrastructure for electronic transactions and digital signatures. Since NFTs are digital assets that are secured on a blockchain, they are covered under this act. Sections 43 and 66 apply to cybercrimes involving NFTs.

Consumer Protection Laws

Consumer protection laws protect purchasers of NFTs against unfair trade practices as well as misleading advertisements. Under the Consumer Protection Act of 2019, there is also a platform for consumers to file complaints concerning fraudulent NFT sales.

Intellectual Property Laws

In NFTs, copyright, trademark, and patent laws play a very important role. Under copyright law, the original creator is conferred with rights relating to the digital asset that would be represented by the NFT.
Trademarks can be used to secure brand names and logos associated with NFTs. The Copyright Act of 1957 and Trademarks Act of 1999 are the primary laws for the protection of intellectual property.

Taxation Of NFTs In India

India's taxation on NFTs is evolving. The government has made it clear that all virtual digital assets are not exempt from taxation concerning NFTs.

• A 30% tax is imposed on income derived from the transfer of virtual digital assets.
• No cost of acquiring the asset is afforded amidst any expenditure or allowance.
• Tax Deducted at Source (TDS) of 1% is applicable for any transaction exceeding a threshold.

This particular taxation exposes that the Indian government recognizes NFTs as tax assets and thus provides a legal framework.

Key Features Of NFTs

• Uniqueness: Each NFT is unique and cannot be replicated.
• Verifiable Ownership: Blockchain technology provides a transparent and immutable record of ownership.
• Transferability: NFTs can be easily transferred between users.
• Programmability: NFTs can be programmed to include specific features or functionalities.

Regulatory Challenges And Considerations Related To NFT

The challenges and considerations are:

Cryptocurrency Dependency

NFT transactions usually involve cryptocurrencies, all of which are heavily subjected to regulation. Therefore, the general regulatory uncertainty surrounding the cryptos also affects the NFT market directly or indirectly.

Risk of Fraud And Scams

The anonymity and decentralized nature of NFTs make them vulnerable to fraud and scams, including:

• Counterfeit NFTs.
• Rug pulls (where developers abandon a project after raising funds).
• Phishing scams.

Money Laundering Concerns

Concerns arise regarding the usage of NFTs for laundering money, given the easy cross-border transaction ability of such tokens. Thus, regulatory measures should be taken to counteract this situation.

Famous NFT Cases in India

A landmark case law on NFT is:

Digital Collectibles Pte Ltd And Ors. vs Galactus Funware Technology Pvt. Ltd.

Here, Plaintiff filed an application for an interim injunction against Defendant on the grounds of infringement of intellectual property concerning NFTs. The plaintiff claimed that the Defendant's activities related to NFTs had violated its exclusive rights. The matter raised issues of intellectual property laws, contracts, and digital ownership rights before the Delhi High Court. The court ultimately denied the application for interim injunction on the grounds that it required further legal scrutiny. This case illustrates the prevailing legal ambivalence that characterizes NFTs in India, especially as far as ownership, copyright, and enforceability of rights over digital assets are concerned.

Future Outlook For NFTs in India

Regulatory clarity and market development will help determine the future of the NFT industry in India. It is likely that as the Indian government creates regulations on all fronts, there shall be a massive boost to the NFT market.

This includes:

• Accepting the new possibilities of NFTs in art, entertainment, and gaming.
• Creating better marketplaces and platforms for NFT transactions.
• Collation of NFTs with other upcoming technologies like the metaverse.
• Widening usage of NFTs in areas like real estate, etc. as proof of ownership.

Resolving regulatory challenges, minimizing risks, and advertising consumer awareness will become paramount for the developmental sustainability of the Indian NFT market.

Conclusion

The legal status of NFTs in India is a work in progress. While existing laws provide a foundational structure, specific regulations are needed to address clarity and reconcile the special challenges presented by NFTs. The NFT market has immense potential for progressive growth marketing opportunities for creators, investors, and consumers while the Indian government continues to work on its framework for regulating this digital asset space.

FAQs

A few FAQs are:

Q1. How are NFTs taxed in India?

NFTs are taxed at 30% on income from their transfer, with a 1% TDS on transactions exceeding a certain threshold.

Q2. What are the risks associated with NFTs?

Risks include fraud, scams, money laundering concerns, and regulatory uncertainty.

Q3. What laws protect NFT creators in India?

Copyright and trademark laws protect the intellectual property associated with NFTs.

Q4. What is the future of NFTs in India?

The future is promising, with potential growth in various industries, but regulatory clarity is crucial.