Real life's Good and Simple Tax

Tax revenue could drain away if rampant GST-free activity takes place in cyberspace

On July 1, the Indian government rolled out the Goods and Services Tax, or GST. Branding it as Good and Simple Tax to assure real-life players that the new taxation system wouldn’t be damaging to real-life fun, Prime Minister Narendra Modi said GST was not just an economic reform but a social reform that would nudge people towards honesty and benefit poor the most. Okay, but this social reform doesn’t really concern me because, although it casts a wide tax net on goods and services, it leaves out the one thing I care about most: virtual good. 

As a result, some very interesting consequences come up. Suppose I sell my virtual magic wand in a virtual world and a real T-shirt in the real world, you will only have to pay GST on the T-shirt transaction, not the virtual magic wand one. Moreover, in order to get licence to sell a T-shirt in the real world, I will have to meet all kinds of regulations and laws. Why do these regulations and laws and GST not apply in cyberspace, if the commercial activity is basically the same? You could argue that the Modi government knows fully well how taxation and regulation can destroy the differentness and fantasy of a virtual world quite completely. But suppose the level of GST-free financial transactions involving magic wands and mighty swords in a virtual world reach a point that a major real-life bank comes to believe a serious opportunity is present in cyberspace. It considers opening a bank somewhere in a virtual world; people could come with their avatars and exchange their game credits, earned from virtual commerce and unpunished by GST, for rupees, dollars or yen, as the case may be. Having obtained the agreement of the developers of the virtual world, the bank could go on to file its papers for an operating licence. But where? What jurisdiction covers the bank’s operations? Perhaps none; and if so, a GST-free and regulation-free mode of operation becomes possible. Not only GST-free but also devoid of so-called progressive taxes (income taxes) that fall harder on the rich; like a boy being ordered to do 100 sit-ups for coming first in the class, and the backbencher getting away punishment-free (tax-free). So what’s progressive about those taxes? 

A still from EVE Online’s virtual universe. Photo: EVE Online

Okay, so operating only in the virtual world could become a cyberspace version of the Cayman Islands. And if virtual worlds become a place that just about everyone visits, the flow of trade that passes through GST-free cyberspace would be quite substantial, and those companies that go out there and take advantage of GST-free deals may find themselves operating in a libertarian’s dreamland. In other words, the space game EVE Online’s longer-term vision of a government-free universe is not just a fanciful hope.

But just as people may be tempted to enter a virtual world that has a GST-free effect on their trades, the state itself may be tempted to intervene in virtual worlds to spoil the party. After all, the government wants to expand its influence. And the government will probably notice that its influence can reduce if a general migration of humans to virtual worlds takes place. 

Tax revenue, the state’s very lifeblood and source of importance, could drain away if rampant GST-free activity takes place in cyberspace. It’s not that virtual worlds are totally devoid of taxes; it’s just that they are seen as problematic because they reduce appetite; they reduce rewards. Therefore, virtual-world ministries acting under libertarian political pressure describe tax not as tax but as fee: transport fee, storage fee, broker’s commission fee. Such fees do not distort fantasy and seem acceptable to players. Modi, like virtual-world ministries, came under political pressure at the time of GST’s roll-out. He had to expand GST as Good and Simple Tax to assure real-life players that the new taxation system wouldn’t be damaging to real-life fun. Let’s hope so, but in case it is damaging to fun, out-migration to cyberspace is always an option.

ashish.sharma@bsmail.in