The term “Metaverse” was first used in Neal Stephenson's 1992 novel, Snow Crash. Concept started long ago with indirect reference from the Master piece series of “Matrix” which was just a mere imagination that point in time, to movie like Ready Player One & finally connection to wider group with Virtual World happened with masterpiece ‘Avatar’.

Imagine walking through a vibrant virtual mall in Decentraland, where your avatar purchases a designer outfit from Gucci, attends a concert in Fortnite, and closes a business deal. Many of us may be unaware, but these digital experiences are no longer just games; they’re real economies, with virtual assets bought, sold, and monetized across borders and platforms.

As brands and individuals alike generate substantial income in these immersive worlds, the question arises: how does India’s tax system keep pace with this virtual revolution? For tax professionals and legal experts, the Metaverse is not just a technological marvel—it’s a new frontier for compliance, policy, and opportunity, challenging traditional notions of asset ownership and income in ways never seen before.

1. Metaverse Unveiled: Redefining Digital Interaction

Described by Mark Zuckerberg as "the next chapter of the internet" and characterized by Satya Nadella as a transformational force, Metaverse has evolved beyond a distant concept into a burgeoning new world. This immersive universe enables users to virtually interact, collaborate, socialize, and showcase themselves within a digital landscape.

The Metaverse is a collective virtual space created by the convergence of virtually enhanced physical reality and interactive digital environments. It integrates technologies like AR/VR, digital twins, and immersive platforms to enable real-time collaboration, commerce, entertainment, and social interaction. It spans centralized platforms (like Meta and Roblox) and decentralized ecosystems (Web3), offering users persistent, shared experiences across gaming, workspaces, retail, and more. Within these virtual spaces, users can experience a sense of ownership over digital assets such as land, buildings, and artwork, facilitated by self-contained economies and native virtual currencies.

Prominent examples of such platforms include Fortnite (~650 million (M) registered users), Roblox (~111 M daily active users with 40% increase Y-on-Y), similarly for The Sandbox, Decentraland, Somnium Space and Second Life each offering unique ecosystems that blend entertainment, commerce, and community.

2. The Metaverse Momentum: Rising Traction and Soaring Valuations

The metaverse is gaining traction due to rapid technological advances and massive investments. In 2025, as per various news articles available in public domain, the metaverse market was valued at ~USD 165Bn and is projected to grow to USD 900bn by 2030 at a CAGR of 40% approx. Big Tech firms like Microsoft, Meta, and Disney are investing billions, accelerating platform capabilities and developer ecosystems.

3. Virtual deals shaping Metaverse Transactions

In the Metaverse, virtual land and Non-fungible Tokens (‘NFT’) are valued similarly to physical assets due to their scarcity and uniqueness. Each plot of land—measured in indivisible tiles with distinct geolocation and blockchain-based identifiers—is sold as a NFT, making it irreplaceable and tradable. Buyers invest in these assets not only for collectability and status, but also for commercial potential—such as leasing, advertising, or creating immersive VR experiences in blockchain-powered virtual spaces. 

Interestingly, there has been recent publications on how Gen Z in India are playing a role to share future of digital assets, where more than 50% of Indian users dealing with blockchain, digital assets are below 35 years of age.

4. Virtual Consideration and Real-World Income: How Value Is Determined and Monetized in the Metaverse

Value in the Metaverse is primarily determined by digital utility and ownership authenticity. Assets like virtual land, Avatars, art, and in-game items are tokenized as NFTs, which are unique and recorded on the blockchain. This ensures transparent and immutable ownership, allowing users and creators to securely trade and monetize their digital goods.

Users can engage in direct NFT sales, participate in secondary markets, and make in-game purchases using either fiat currency (e.g., PayPal, Debit/credit cards, or bank transfers etc.) or cryptocurrency.  E.g. Connecting to real life transaction, it may be interesting to note that Bollywood star Mr. Amitabh Bachchan’s NFT collection (his father’s famous poem) has been sold for ~0.96M Dollars in 2021.

Additionally, brands are leveraging virtual commerce platforms like Meta Pay and Roblox shopping to activate new revenue streams. Each metaverse platform operates with its own native token (e.g., MANA for Decentraland, SAND token for The Sandbox), which users acquire by converting fiat currency through exchanges like Coinbase or Binance, and store in crypto wallets for seamless transactions.

5. Virtual Income, Real Tax Question: Permanent Establishment (‘PE’), Significant Economic Presence (‘SEP’)?

The rapid digitalization of global commerce has fundamentally transformed how businesses operate, shifting value creation from brick-and-mortar establishments to digital platforms. MNCs now generate substantial revenue from cross-border digital services without physical presence in market. In particular, the rise of virtual platforms such as the Metaverse demands re-evaluation of conventional tax principles to ensure clarity, consistency, and fairness in taxation.

The taxation in India of digital economic transaction can broadly be categorized into 3 key areas.

5.1. Transactions between Residents:

• Rent Income from Virtual property or Land- Any lease income earned from virtual land in Metaverse may not qualify as House Property under Indian Income-tax (‘The Act’). In such case, it would be interesting to explore possibility to tax such income under Other Sources or Income from Business, unless specific provisions are introduced to tax such income from virtual assets.
• Sale of Virtual Land - In the Metaverse, virtual land is represented as NFTs. Hence, if revenue authorities notify such virtual land as a form of NFTs or Virtual Digital Asset (VDA), the sale proceeds may attract tax implications u/s. 115BBH(1)(a) of the Act, and if so, it may result in 30% tax on such income. Additionally, section 194S mandates that buyer must deduct Tax Deducted at Source (TDS) at 1% of the consideration paid for the transfer of VDAs. Therefore, if virtual land is notified as a VDA or interpreted by authorities that way, then buyer would be obligated to deduct TDS. This will be essential for determining tax base from income-tax and GST perspective.

In absence of any notification by CBDT classifying NFTs representing virtual land as VDAs may create ambiguity regarding appropriate head of income—whether Business, Capital Gains or Other Sources.  Though, CBDT vide notification dated 30^th June 2022 clarified that, an NFT whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable is excluded from the scope of NFT. It was earlier not clear whether CBDT may view sale of NFT as combination of two transactions, i.e. sale of NFT itself and sale of underlying asset represented by NFT. The clarification seems to exclude cases, where physical assets like land, painting etc. are tokenized & transferred through NFTs.

Income from running a business in Metaverse - If an Indian resident hosts a virtual event or carry out business activities such as online store, the income earned needs to be evaluated on possibility to be taxed under Business Income or under Other Sources, depending on the nature and regularity of the activity. E.g. Singer Daler Mehndi in 2022 has reportedly become the first Indian to buy land in Metaverse. He has bought the land through the Metaverse platform PartyNite (apparently appears to be Indian platform provider in Hyderabad) and has named it Balle Balle Land with an intent to host Bollywood films and music concerts in his virtual Land.

5.2.  Transactions between Non- Residents (NRs) and Residents:

As digitalization transforms global commerce, countries are adopting varied frameworks to tax income earned by NRs from digital transactions. Below are key approaches currently shaping the tax landscape in this domain: 

• Significant Economic Presence - India’s Nexus Rule for the Digital Economy:  India’s introduction of SEP concept stems from the OECD/G20 BEPS Action Plan 1, which addresses the tax challenges posed by the digitalization of the global economy. Effective from April 1, 2021, SEP was incorporated into Indian domestic tax law to establish a new nexus rule for taxing non-residents.

Under this provision, a non-resident is deemed to have a business connection in India—and thereby subject to Indian tax, if they engage in either: (i) transactions involving goods, services, or property with Indian residents exceeding ₹20 million annually, or (ii) systematic and continuous interaction with 300,000 or more users in India.

Notably, SEP applies regardless of where contracts are signed or services are delivered, and it encompasses both digital and offline cross-border transactions.

However, the practical impact of SEP is currently limited in cases where India has a tax treaty with the non-resident’s country of residence. Most treaties require the existence of PE in India for taxation rights to arise. Therefore, unless treaty benefits are denied under anti-abuse provisions such as the Principal Purpose Test (PPT)/ Beneficial ownership (UBO) or General Anti-Avoidance Rules (GAAR), SEP provisions do not override treaty protections. As such, SEP primarily affects non-residents from jurisdictions without a tax treaty with India or where treaty benefits are successfully challenged.

5.3. Transactions between Non-residents

In cases where transactions occur between two NRs however having some nexus within the Indian jurisdiction, then it will be interesting to observe the measures adopted by revenue authorities in India to bring taxability of such transactions within the ambit of the Income Tax Act. Illustrative circumstances relevant to analyze could be where server is located in India or employees have developed program are based in India and so on.

• Digital PE - A Shifting Tax Nexus in the Age of Remote Services

As digitalization reshapes global commerce, traditional tax concepts like PE are being re-evaluated. The idea of a Digital or Virtual PE emerged to address situations where businesses deliver services remotely, without any physical presence in the target market. Jurisdictions like Saudi Arabia initially embraced this model, recognizing remote service delivery, as sufficient to trigger a PE. However, in a significant policy reversal, Saudi Arabia abolished the Virtual Service PE through Circular[1], reinstating the requirement of physical presence for PE recognition and aligning with conventional treaty standards.

India, meanwhile, has seen judicial scrutiny of the concept. In a key ruling, the Delhi Tribunal[2] examined whether remote services could constitute a Virtual Service PE under the India-Singapore DTAA. The Tribunal concluded that, in the absence of treaty amendments, the traditional requirement of physical rendition of services remains applicable. It emphasized that while the OECD/G20 BEPS 2018 Interim Report explores the idea of Virtual PE, such interpretations are not enforceable unless explicitly incorporated into treaty language—making them susceptible to legal challenge.

These developments reflect a promising shift in global tax discussions and debates: as digital business models evolve, there's growing momentum toward modernizing tax frameworks. With continued collaboration and treaty innovation, the concept of Virtual PE has the potential to reshape international taxation in a way that better aligns with the digital age.

• Taxation of Automated Digital Services (ADS)

Article 12B of the UN Model Convention (2021) establishes a dedicated framework for taxing cross-border income derived from Automated Digital Services (ADS). It grants the source jurisdiction, where income originates, the right to impose tax on such income, even if the recipient is a resident of other contracting state.

This tax is subject to a maximum rate, determined through bilateral negotiations, and is levied on the gross amount of payments underlying the ADS income. The scope of ADS includes services delivered over electronic networks with minimal human intervention, such as online advertising, user data monetization, search engines, social media platforms, cloud computing, and standardized digital content or teaching services.

In addition to the gross-based taxation method, Article 12B offers an alternative profit-based regime. If the beneficial owner elects this option, the source country may tax qualified profits, calculated as 30% of the gross revenue from ADS in that jurisdiction, multiplied by the profitability ratio of the relevant business segment.

However, its effectiveness depends on bilateral treaty negotiations and the willingness of jurisdictions to adopt and implement this provision, making it a significant step toward a more equitable international tax framework in the digital age.

• Global Tax Reforms: OECD Pillar one & two

The OECD’s Pillar One and Pillar Two frameworks propose a global shift in digital taxation. Pillar One: Allocates a share of global profits to market jurisdictions like India. Pillar Two: Introduces a 15% global minimum corporate tax, reducing tax avoidance.

6. Complexities and Challenges for governments and organizations in the Digital Tax Era

The rapid adoption of the Metaverse is intensifying tax challenges and Revenue authorities may strategize to keep up the pace, particularly around determining jurisdictional taxing rights for digital transactions. The use of cryptocurrencies as consideration for digital asset purchases adds another layer of complexity. A striking example is pop star Ariana Grande’s virtual concert on Fortnite, which drew 78 million paying viewers globally and generated over $20 million in revenue. Yet, there remains no global consensus on which jurisdiction should tax such income, whether it's the location of the performer or each audience member, underscoring the urgent need for international tax clarity in the digital age.

Key Legal Barriers Under Tax Treaties in the Digital Economy: India’s efforts to tax digital transactions face significant legal constraints due to existing DTAAs. These DTAAs typically hold supremacy over domestic law, limiting the application of unilateral measures like SEP. Most DTAAs still require a physical presence to establish a PE, which restricts India’s ability to tax remote digital services. Furthermore, India has had limited success in renegotiating treaties to incorporate digital nexus concepts or to implement it for long term (e.g. Equalization levy), making treaty override or anti-abuse provisions the only viable enforcement tools in many cases.

7. Concluding Remarks:

OECD is currently working toward establishing a global crypto tax framework aimed at harmonizing how jurisdictions tax digital assets and transactions. However, the timeline and level of international adoption remain uncertain. In the absence of a unified approach, each countries continue to apply divergent classifications and tax treatments to digital transactions. This fragmented landscape creates significant compliance challenges and risks for multinational businesses, which must carefully manage evolving rules across jurisdictions while awaiting broader consensus.

While the metaverse and its underlying Web3 technologies introduce complex tax challenges, particularly around jurisdictional rights and digital asset transactions, they also offer transformative opportunities for tax administration. These technologies can empower tax professionals with advanced tools for real-time, transparent, and efficient tax collection, reducing compliance costs and improving accuracy for both taxpayers and authorities. As adoption accelerates, the focus will shift from managing complexity to leveraging innovation for smarter tax systems.

While framing a tax framework, an ask from businesses would be relevant to keep in mind (e.g. In case of existing section for VDA, against flat tax of 30%, corresponding exp deductions should be considered for businesses and similarly amendment to allow set off and c/f of losses against VDA should be evaluated). Corresponding balanced approach for taxing Digital PE/Metaverse in future could be considered as welcome step from businesses/MNCs.

Disclaimer: The views expressed in this article are solely based on publicly available information, including news reports, industry publications, tax and regulatory updates. They do not reflect the personal opinions or professional advice of the author. Readers are advised to consult appropriate legal or tax professionals before making any decisions based on the content herein.

[1] ZATCA Circular No. 2303001, issued on 17 May 2023

[2] Clifford Chance PTE Ltd. vs. ACIT [2024] 160 taxmann.com 424 (Delhi – Trib.)