By Gunjan Prabhakaran and Payal Thaker
Our last article (dated 18 May 2022) highlighted the differences between ‘gaming’ and ‘gambling’ which elicited broad contours of what constitutes ‘game of skill’ viz-a-viz ‘game of chance’. GST rates applicable on online gaming should revolve around a technical evaluation and each offering should be subjected to scrutiny through the lens of ‘skill’ viz-a-viz ‘chance’. However, this examination would have been even more relevant if the Government adopted differential GST rates and valuation methodologies for the game of ‘skill’ vs game of ‘chance’.
The gaming industry has been waiting with hope and optimism for the outcome of the meeting of the Group of Ministers (GoM), which was expected to discuss and recommend the approach of taxing online gaming platforms and the valuation method of taxing this sector. However, the optimism has turned sour with the announcement. It appears that the numerous pleas to consider and adopt global best practices, have been unheard and the highest GST rate of 28% is proposed to be levied on online gaming.
Globally, most countries have regulated the online gaming sector with specific legislations dealing with various aspects of online gaming such as licensing, taxability, valuation, etc. For instance, the UK levies a separate duty on online gaming called ‘Remote Gaming Duty’ (RGD) which is levied at 21% on ‘profits’ of the remote gaming provider and played by the UK residents. Further, ‘profits’ would mean, the difference between the total amount due from the UK residents and the amount paid separately as prizes or that goes into the pool of winning money. Therefore, in essence, the tax is levied on the ‘rake fees’ earned by the gaming companies who conduct games on their platforms.
In the USA, the taxes are levied at a federal as well as state level, where most states levy value-based tax on Gross Gaming Revenue (GGR). In general parlance, GGR means the annual total amount of cash wagered on games and admission fees, less any amounts paid out as prize money. Some states in the USA also allow the exclusion of certain expenses from adjusted gaming revenue. This ensures that the levy of tax is on the amounts received, less what is paid out. Thus, in the USA too, though the valuation mechanism may be different, in principle the tax is levied on the amount of ‘rake fees’ earned by the gaming companies. Further, globally, the tax rate for online gaming is around 20%.
In India, since gambling is taxed at the highest GST bracket of 28%, the industry hoped that as a ‘game of skill’ online gaming would stand distinguished by the Courts and the GST rate on the service fees paid would be taxed at a lower rate.
The value for levy of tax globally is not the prize money pool which is distributed to the winner. If India were to follow the global best practices, then GST would have to be levied only on the component which is collected and retained by the gaming companies for their services of providing a platform and not on the entire prize money. The gaming industry has been pleading through numerous representations, to consider global best practices while levying GST.
The GoM which met on 18 May 2022, announced their decisions on the GST rate and valuation methodology, which is likely to have a profound impact on the operations and viability of the online gaming industry in India. As far as the GST rate is concerned, the GoM has unanimously recommended the highest GST rate of 28%. The increased tax burden may veer away the end users, as a result of which, the customer base and the viability of the gaming industry might face severe strains.
The online gaming industry has shown tremendous growth potential over the last couple of decades including a significant increase in the Government exchequer; the decline in customer base would stand to deteriorate the share of Government revenue from this sector. Further, it has been indicated that the tax will be imposed on the initial betting and the gaming amount and the GoM appears to be not in favour of levying GST on every bet or prize money. This may provide some succour to an otherwise gloomy outlook, and the valuation methodology appears to travel the path of global best practices.
The GoM is expected to submit a detailed report in a couple of days and as the details are made public, it will be important to evaluate the impact on the industry and explore legal structures to contain the impact. Nonetheless, the formal communication from the GST Council and its implementation through suitable notifications/clarifications would be key to managing the transition.
(Gunjan Prabhakaran is Partner & Leader – Indirect Tax at BDO India and Payal Thaker is Partner – Indirect Tax at BDO India. The views expressed are authors’ own.)