– By Aarushi Jain and Anirban Mohapatra
Growth prospects of any industry depends on clarity of the country’s legal regulatory framework and the tax policies surrounding it. While the former determines the ability to do business, the latter is crucial to decide the feasibility of it. India’s online gaming industry is not indifferent to this principle.
Positive regulatory as well as tax changes have been made in the past few months to give impetus to the sunrise sector. The key one being the amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Online Gaming Rules”)1 which now regulates gaming activities in the online space. By virtue of the new rules, there will soon be a mechanism in place (courtesy self-regulatory bodies) to decide which games will be permissible to be published online, and which will not. Recent amendments to the income tax law clarifying the method of computation of tax on net-winnings from online games2, and progressive decision of the Karnataka High Court negating the demand of tax authorities to charge 28 per cent Goods and Services Tax (GST) levy for skill games (Gameskraft case3) have also been very reassuring for the industry.
However, there is one big issue left to navigate. Of the GST levy.
The online gaming industry is eagerly awaiting the outcome of the 50th GST Council meet, scheduled on July 11, 2023. The decision on the GST levy (18 per cent or 28 per cent) on online gaming activities has been outstanding for a while, and a clarity is the definite need of the hour.
To summarize the issue, it was recommended by the Group of Ministers (tasked to submit a report on GST levy for Casinos, Race Courses and Online Gaming) in the 47th meeting of the GST Council (June 2022) that:
- online gaming activities should be taxed at 28 per cent;
- the levy should be on full value of the consideration paid by user (including entry fee etc);
- there should be a uniform levy for games of skill or of chance.
The recommendations may need a relook in light of the recent events discussed above and for reasons discussed below.
Online gaming platforms are in-essence a technology or service provider platform which facilitates playing of games by players online. Although a player pays the entire amount to the platform (say Rs 1000), the platform only keeps its platform fee or commission (say Rs 100 i.e. gross gaming revenue (“GGR”)) for the platform services, and safe-keeps the rest of the player money in fiduciary capacity. The player can play with the remaining money (Rs 900 in this case), win more and cash-out, or lose it to other players during the game(s). In either case, the Rs 900 is not a “consideration” received by the platform, especially since it has to pay-back the money to the player or the other winners. While this is how the industry operated, the process has legal backing in the Online Gaming Rules, which not only identify online gaming platforms as “intermediaries” (as they facilitate the playing of games between players), but also requires them to have clear rules of refunds, withdrawals etc. as well as measures to protect player deposits. Further, the income earned from winnings are taxable at the hand of the player, and the platform deducts TDS before the pay-outs.
Thus, while charging a levy on the Rs 100, i.e., value for supply of service of the platform, seems fair, imposing levy on the entire player amount seems an overkill. The balance Rs 900 is likely in the nature of actionable claim (not in the nature of chance to win in gambling or betting activity) on which GST should not apply as it is neither supply of goods nor services.
Another crucial point in the GST debate is the categorization of online gaming activity for GST levy purposes. The concept of skill v chance games has been recognized under state laws, as well as in a plethora of judgements of the Supreme Court and High Courts of India. The Online Gaming Rules don’t delve into the skill v chance element for qualification of a game. Instead, they mandate self-regulatory bodies to ensure that the online real money game does not involve wagering on any outcome. While there is a marked shift from the use of terminology of “gambling” or “betting”, as was used in the draft version of the rules, the bottom line is that a permissible online game is not considered “gambling” under the rules.
A 28 per cent GST levy on online gaming activities as per the existing GST framework is premised on the assumption that the activity is gambling or betting in nature. Since games of skill or permissible online games (under the online gaming rules) are not gambling per se, to treat all games as equal (under the ambit of gambling) may not be the correct way of approaching this question. It has never been the ask of the industry to avoid GST or reduce the rate. Infact, it is the conscious and proactive efforts of the industry that has resulted in the Online Gaming Rules, a regulatory framework for the online gaming sector.
The industry has been charging an 18 per cent GST levy, on GGR, as of now. The monetary implications of a GST rate hike to 28 per cent, payable on the entire player deposit amount (instead of GGR), will be huge. The tax burden may need to be passed on to the players in some form to make the math work for business. The profit margin of gaming platforms may be adversely impacted thereby reducing its popularity among potential investors and could also influence inflow of foreign investment and innovation in the graphic and technology sector. Any change along the lines of increasing the potential levy of GST may thus be counter intuitive and cause uncertainty in the industry. It may also give rise to unscrupulous models for avoidance of tax, resulting in revenue leak for the exchequer.
The GST Council should, therefore, consider a clear, moderate tax regime only on platform fee to provide impetus and generate momentum for the upward growth of the gaming sector.
(Aarushi Jain is the Partner & Head – Media, Education & Gaming; and Anirban Mohapatra is the Partner at Cyril Amarchand Mangaldas.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)