Gaming Companies Will Need to Put in Place Interim Measures Until the Courts Reach a Decision on the Tax Rates and Value

INDIA (July 25, 2023) — It appears that the online gaming sector will certainly go through a disruption and the gaming platforms will have to modify their business models and look at avenues to cope with the loss of business and profitability. Till the Courts reach a finality on the matter, gaming companies will need to put in place interim measures to deal with uncertainties on the tax rates and value, writes Manish Mishra, Head of Practice – Indirect Tax at leading law firm JSA.

Ever since the introduction of GST, taxability of online gaming has been a matter of significant debate. While such activities are treated as actionable claims, the law distinguishes between games of skill and games of chance (such as betting and gambling), for determining the levy of tax. While games of chance were subject to GST at 28 percent on full value contributed by the users including the prize pool, skill-based games were taxed at 18 percent, only on the platform fee.

A Group of Ministers (GOM) was constituted to review the taxability of the sector, which reached a broad agreement that GST at the rate of 28 percent should be levied on online gaming. However, GOM could not arrive at a consensus and the final decision was left to the GST Council in this regard.

GST Council in its recent 50th meeting on July 11 has recommended that GST should be levied at 28 percent on full value of bets placed, including the platform fee. While the recommendations of the Council require amendments in the law to provide a mechanism for levying tax on the full value, gaming industry is already up in arms against the recommendation and has raised grave concerns on legality and economic consequences of the move.

This disturbs the settled position for the sector, given that the courts had treated online games of skill, distinct from betting and gambling, thereby ruling that no tax should be levied upon the prize pool contributed by the user. It is recognised that while there is an element of ‘chance’ in each game, where ‘the exercise of skill’ controls the chance element, such activity should qualify as a game of skill and only those users who have the requisite skills have higher chance of success, unlike betting and gambling where the outcome is purely dependent upon chance. Further, the recent amendments to MEITY’s Intermediary Rules and Income Tax Act with respect to online gaming indicate that the Government itself had recognized online gaming distinct from betting and gambling.

Levy of GST at the highest rate of 28 percent, which is reserved for sin or luxury goods, is also being argued from a moral and social standpoint.  It seems that the Government is of the view that online games, when played for stakes on outcomes, have an element of chance, which coupled with their easy accessibility to the users could be addictive. Therefore, it appears that the Government wants to curb consumption by imposing a high rate of GST on the sector. However, such moral or sin tax have rarely led to curbing the consumption, as seen from the outcome of the taxation policy on the liquor and tobacco sectors.

While the recommendations seem to run contrary to the established jurisprudence on the matter, levying GST on full value contributed by users is also not justified, since the prize pool or the bet value, do not form an income or revenue for the gaming platforms who have no lien or rights over such amount which needs to be distributed as winnings. Accordingly, such value should not constitute towards value of service, exigible to GST.

Studies indicate that such a high tax incidence on the sector may have negative consequences on its viability, since the tax burden would ultimately be borne by the user, who will be deterred from joining the games due to significantly reduced returns. The sector has seen significant FDI and contributed immensely to innovation and R&D, which may be impacted due to potential loss of income and business. Also, most countries tax online games in the range of 15 to 21 percent on the platform fee only. This may cause a shift of business from India to more favourable jurisdictions.

It is expected that the legality of this proposed amendment will be put to test before the Courts. However, one hopes that the move will be prospective and not given retrospective effect. The fear emanates from the reports that the GST authorities are already in the process of issuing notices to several gaming companies for the past period.

As of now, it appears that the online gaming sector will certainly go through a disruption. Gaming platforms will have to modify their business models and look at avenues to cope with the loss of business and profitability. Till the Courts reach a finality on the matter, gaming companies will need to put in place interim measures to deal with uncertainties on the tax rates and value.

One expects that the Government will consider representations from the industry and adopt a consultative process to arrive at a balanced view, before proceeding with the proposed amendments.

This article was first published in CNBC

By: Manish Mishra

SOURCES: JSA – Lexology