The online gaming industry seems constantly to be in the eye of the storm. After the recent GST blow the industry is now being served a slew of tax notices – the cumulative value of which is pegged to be at INR 100,000 crore, which surpasses the actual revenue of the sector manifold. Many are seeing this as the end of the road for this industry which was once pegged as the poster child of “Make in India” and “Digital India” programs. Are the tax notices justified? Here is a deep dive into the same.
A history of taxation of online gaming in India:
The Indian online gaming industry is 15 years old. Before the implementation of GST, India followed a different indirect tax regime and online gaming was under the Service Tax regime where the online gaming companies were being taxed as an Online Information Data Access or Retrieval (OIDAR) service. Under the Service Tax regime, gaming platforms were considered distinct from wagering, gambling and betting and were registered under the IT/ITeS category and paid tax on the platform fee charged to players towards the services rendered by them, which is known as Gross Gaming Revenue. The prize pool which gets distributed to the users was outside of the purview of taxation. Wagering / Gambling on the other hand was excluded from the ambit of Service Tax and was under the purview of state legislation.
As India transitioned to the new GST regime in 2017, the business models of the online skill gaming companies remained the same and distinct from wagering, betting and gambling services. They therefore continued to pay taxes on: “GGR – the fees levied by them for facilitating the game of skill for the users.”
In August 2023, the Government amended law and announced that the online gaming industry will have to pay 28% on total value of deposits with the intent of making it effective on Oct 01, 2023.
Now the DGGI has started sending notices to the gaming companies for past recovery of the dues which raises the below issues, especially in the light of the aforementioned development:
Contest entry amount cannot be treated as value of “goods” – Post the decision taken in the 51st GST Council meeting, the Council amended the law to include actionable claims as taxable items for online gaming. The corollary of the same therefore is that it was earlier excluded and only GGR was taxable. Treating full contest entry amount as ‘goods’ only for the purpose of retrospective taxation is unreasonable.
Making no distinction between “games of skill” and “games of chance” – There was a clear distinction between online gaming and gambling, wagering, betting under the previous tax regime. Online gaming was explicitly being taxed as an OIDAR service while wagering, betting and gambling was being legislated by the states. In view of this, not distinguishing ‘games of skill’ and ‘games of chance’ goes against the historical precedence. Legally and factually, jurisprudence is settled that games of skill regardless of being played for money or otherwise are not wagering, gambling and betting and only side-betting in a game of skill will assume the character of wagering/betting/gambling.
Ignoring Legal Position of Games of Skill – Various high courts and the Honourable Supreme Court have time and again reinforced that fantasy sports and online rummy are skill predominant, and not wagering/betting/gambling. Any misconception of such formats of online gaming being akin to wagering/betting/gambling has been quelled with the appointment of MeitY as the nodal Ministry and will be further reinforced with the awaited SRB certification. With this, taxing online gaming like betting and gambling will go against the constitutional mandate that unequals can’t be treated equally.
OG industry should not pay for the GST authorities’ lack of understanding – The various notices issued by the DGGI also beg the question that why has there been a six year delay on the part of the GST authorities in amending the GST laws for the online gaming industry. The industry was compliant and was paying tax on GGR as was mandated under the service tax regime. Even under the GST law, (online gaming being distinct from wagering, gambling and betting), it was clear that online gaming platforms were obligated to pay 18% on GGR. The GoM formed to revisit the GST laws for OG deliberated the matter for three long years, creating uncertainty for the industry that was growing at a breakneck pace. Even the GoM report concluded that online games of skill are distinct from wagering, gambling and betting and actionable claims cannot be taxed for online games of skill. Given the GST law was amended in August 2023, the retrospective demand is very unreasonable and is a resuscitation of a ghost of the past (eg. vodafone tax) which had a chilling effect on investor sentiment and adversely impacted India’s reputation as a business friendly country.
In many cases the demand by the GST authorities is in multiples of the actual revenue clocked by the companies. There is very little chance that any of these demands can be paid by the companies. This will result in a multitude of litigations and long drawn legal fights which will not benefit any stakeholder. Hope that the authorities take due cognizance of the issues and work towards finding conducive solutions for all.