By Alok Chopra
There is a sword of Damocles that hangs on the online gaming industry in India in the form of tax demands under the GST law for the period from July 2017 to September 2023. It is up to the highest forum of judiciary to decide the fate in this regard. However, it is a highly anxious period for the industry to carry out business as usual in this uncertain scenario. To put things into perspective, as per media reports, 71 online gaming companies have been issued show cause notices by the investigative arm of the GST administration – DGGI – with tax demands amounting to Rs 1.12 lakh crore, excluding interest and penalty. These demand notices were issued under the extended time period clause of the GST Act which mandates up to 100% penalty, leading to potential outstanding demands of over Rs 2.3 lakh crore, excluding interest.
To simplify the maze of tax laws, the basic premise of the notices is that all online gaming, irrespective of whether it is a game of skill or chance, amounts to betting. This is against settled jurisprudence of the Supreme Court and various High Courts, which in a catena of cases have held that games of skill when played with money do not amount to gambling and betting. It is necessary to underscore that each game must be evaluated separately to arrive at the nature of a game, i.e. skill or chance. The Rs 21,000 crore notice issued to Gameskraft was set aside by the High Court of Karnataka on the same ratio.
In the pre-GST regime, service tax was levied on online gaming under the category of Online Information and Database Access Retrieval (OIDAR) Services. They were not treated as akin to gambling & betting, whose taxation was within the ambit of the State governments according to the division of powers in the Constitution. The online gaming industry found that the distinction continued under the GST regime since online gaming was taxed as a supply of services given its specific inclusion under the definition of OIDAR services in the GST statute whereas the actionable claims from lottery, betting and gambling were to be taxed as supply of goods at 100% of the face value of the bet. The online gaming industry has been engaging with the GST Council seeking clarity on the value of supply for online games, leading to increased policy discussions in the GST council in this regard. A Group of Ministers was constituted in May 2021 and a final decision was made by the council in August 2023. Accordingly, the amendment defined online money gaming and grouped it with lottery, betting and gambling as a specified actionable claim subject to tax at 28% of the deposit value. The industry has complied with this decision as effective from October 1, 2023.
However, the dispute is for the period prior to this amendment. The industry has been filing returns since 2017 and the GST Council was aware of the value of supply on which industry was paying GST. Extant jurisprudence has clearly distinguished online skill gaming from betting and gambling. Therefore, the industry could not have classified themselves as betting, or gambling for the purpose of taxation. The allegations pertaining to willful evasion must be seen in the light of the fact that the industry has been in dialogue on this issue of valuation with the council for all these years.
The matter is sub-judice as of now. If the validity of the notices is upheld, it is almost certain that all the start-ups in this domain will file for bankruptcy and foreign investment in excess of Rs 20,000 crore will have to be written off. In addition to job losses, future potential revenues will be lost, with relocation of businesses to more favorable tax jurisdictions.
As per data provided by the Finance Ministry, there has been a six-fold jump in revenues from the industry in the first 3 months after the October amendment, with a contribution of around Rs 3,500 crore in the first three months and a potential collection of between Rs 12,000 to Rs 14,000 crore annually in GST, in addition to the collection of income tax revenues in this regard.
The Government has repeatedly clarified that the October 2023 GST online gaming amendments are prospective in nature. The Taxation Laws Amendment Act (2021) was brought in to settle retrospective tax claims estimated to be over INR 97,000 crores under the Income Tax Act. These amendments were brought in after prolonged litigation and the legislative note introducing the amendment reasoned that retrospective taxation is against the principle of tax certainty, does not support reforms introduced to create a positive environment for investments, and damages India’s reputation as an attractive economic destination.
All these reasons are equally valid for the GST Council in their wisdom to close the retrospective demands on as is basis and to ensure that 28% regime on deposits pertaining to online money gaming post October 2023 is implemented smoothly. Recent media reports quoting the Finance Ministry are a positive sign and a ray of hope that the council will make the right decision at the right time to protect and balance the interests of all the stakeholders, thereby ensuring that revenue collection increases going forward, only at the expense of the progressive growth of the online gaming industry.
The author served in the Indian Revenue Service for over three decades