INTRODUCTION
With the easy and inexpensive availability of the internet, India has now become one of the largest mobile gaming markets in terms of application download. According to a Forbes report, released earlier this year, India is home to more than 420 million online gamers and the number is second highest in the world.
India also has the largest fantasy sports market, with more than 130 million users engaged in the games. This online skill-based is very popular in India due to the winnings it provides on a small entry fee. It can be mistaken for a game of chance like gambling and betting, but the element of skill distinguishes them.
With the introduction of the Goods and Services Tax (hereinafter referred to as the “GST”) the goods and services are classified and are taxed at different rates as prescribed under law. Online Gaming at present is taxed at 18% on the platform fee; but the GST Council has proposed levying a 28% tax on online gaming on the full value, including prize money, both for skilled and unskilled games.
This blog analyses the current GST Framework for Online Gaming, the proposed changes, and the effect of the changes on the Industry.
ONLINE SKILL GAMING
Online Skill Gaming works on the principle that the user has to pay an entry fee for the platform, which would be pooled in a fiduciary account, and after deduction of the costs, the prizes are distributed from the pooled amount to the winners. This simple process is how fantasy sports work and the platform on which they are played earn their revenue by charging a platform fee which is included in the entry fee.
Fantasy sports games have also gained popularity due to low entry prices, which can be as low as Rs. 100, and the winnings, which can be in crores, as claimed by the gaming platforms.
The larger category of Online Gaming works on the same principle: players deposit money with the platform, which then holds the money as trust and then transfers it to the winner after deductions.
CURRENT TAX REGIME
The GST regime classifies and imposes various rates on goods and services; 28% being the highest on a few items. Online Skilling games are at present taxed on the platform fee at 18% and not on the price pool. The winnings from online games are taxable at 30% per the Income Tax Act, 1969.
Section 15(1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) provides that the value of the supply of goods and services for levy of GST is the price actually paid or payable for the said supply or the transaction value where the supplier and recipient are unrelated and the price is the sole consideration.
In the case of Online Gaming, the only amount which is received as consideration by the applications and platforms is the platform fee and the pool prize is not considered as part of the consideration of taxable supply under GST. Hence, only the platform fee is taxed under the current tax regime, which is the transaction value.
The GST Rate of Supply notified under Notification 11/2017-Central Tax dated 28.06.2017, states that Online Gaming under HSN Code 9984 and HSN Code 9997 would be charged at 18% GST, whereas, Gambling activities under HSN Code 9996 would be charged at 28% GST.
Moreover, the supplies stated under Rule 31A of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the “CGST Rules”) which includes betting, gambling and horse racing, the tax would be levied upon the entire transaction value.
PROPOSED TAX ON ONLINE GAMING
Recently, a panel of State Finance Ministers (hereinafter referred to as the “Panel”) in their meeting on taxation of Online Gaming had a discussion with respect to the rate of tax on Online Gaming where the majority of the States including Tamil Nadu, Meghalaya, Maharashtra, and Gujarat were open to the idea of levying 28% GST on Online Gaming both Game of skills and Game of chance. Whereas, States such as Uttar Pradesh and West Bengal prefer to have different rates for a game of skills and the game of chance.
The Panel because of differences of opinion could not come to a unanimous conclusion and therefore, the Panel will refer all the suggestions to the GST Council for a final decision.
The GST Council in its next meeting will reportedly finalise the rate of tax on Online Gaming. The proposal of this rate of tax comes under the broader stance of imposing a uniform 28% rate on the three categories: Casinos, Horse Race Courses, and Online Gaming, irrespective of whether it is a game of skill or chance.
Hence, it is proposed by the Panel that the categorization of skill or chance of Online Gaming be done away with, and a blanket tax rate of 28% is proposed to be levied on all kinds of online gaming.
CRITICISMS OF THE PROPOSED RATE OF TAX
The imposition of the proposed tax rate, on the complete value of the pooled amount, is against the legislative intent of GST of levying tax only on the consideration.
The prize money held by the Platform as a custodian is an actionable claim and the Platform has no right over it. The Bombay High Court in Gurdeep Singh Sachar [2019 (30) G.S.T.L. 441] observed that the amount pooled in the escrow account is an ‘actionable claim’ as the same is to be distributed amongst the winning members as per the outcome of a game, and the said actionable claim would fall under Entry 6 of the Schedule III under Section 7(2) of CGST Act.
It was also held that this activity or transaction pertaining to such actionable claim can neither be considered a supply of goods nor supply of services and is thus, clearly exempted from levy of any GST, and as such Rule 31A (3) of CGST Rules is not applicable in the present matter.
The imposition of tax on the entire amount would increase the tax by 10 to 20 times which in turn would lead to an increase in cost per game for the players by 3 to 4 times and eventually affect the market players in providing such services and players indulging in these games affecting the Industry as a whole.
One of the criticisms of the proposed tax rate by the Panel is that the Panel has failed to appreciate the fact that these online games involve skill and are not just a matter of chance as held in Varun Gumber vs Union Territory, Chandigarh & Ors. [CWP No. 7559/2017] by the __Punjab and Haryana High__ Court and observed that the fantasy sports format involves a substantial degree of skill and classified it as a game of skill.
Under the GST Act, gambling is taxed at 28%, and the proposal of the Panel to include the game of skill and game of chance in the same ambit and tax it similarly is opposed to the legislature’s intended. This would include all the online games under the same tax rate, which would result in arbitrary taxation. Moreover, the Online Gaming Industry would also suffer a loss due to an increase in taxability and which would in turn decrease the revenue.
IMPACT ON THE INDUSTRY
The Online Gaming Industry is lucrative due to the huge number of users and consumers. The imposition of higher tax on the complete value would be detrimental to the Platforms as the only income for these Platforms is the Platform Fee.
The further increase in the tax slab would lead to lesser income for the Platforms and even make the games costlier for the players with a higher tax being imposed on the entry fee.
The Online Gaming Industry is already a large tax contributor to the exchequer. Further, increasing the tax would be detrimental to the growth of the Industry affecting even the animation, visual effects, gaming, and comic sector which has developed closely with only gaming.
Hence, not only the Online Gaming Industry but many other associated industries will be affected due to an increase in the levy of taxes.
The Industry believes that higher taxation may reduce the attractiveness of online skill-based gaming and can even impact Foreign Direct Investment inflows, existing employment as well as future employment opportunities, investment in marketing and Information Technology services, ancillary industries, etc.
AMLEGALS REMARKS
The Online Gaming Industry is a lucrative market and platform for the players due to the abundance of users, revenue can be generated through the Platform Fee. Under the current taxation regime, these games have been classified as games involving skill, not games of chance, and thus are placed separately from gambling and betting.
The GST at present which is imposed on these services is 18% only on the Platform Fee which is the consideration that the Platforms receive for the services. The new proposal by the Panel in imposing a higher rate of 28% and on the complete entry fee would be detrimental due to the drastic increase in costs of the game and less revenue for the Platforms which would deter them from providing such services.
It is evident that not only the Online Gaming Industry would be affected, but other related industries of telecommunication and information technology would also be affected. Moreover, it is in contravention of the legislative intent and the provisions of the taxability under the CGST Act. It would be the responsibility of the GST Council to look into and distinguish between games of chance and skill, accordingly impose rates, and also consider the imposition of taxes on the entry fee as a whole.
– Team AMLEGALS assisted by Mr. Niloy Ghosh (Intern)
For any queries or feedback, please feel free to get in touch with aditi.tiwari@amlegals.com or himanshi.patwa@amlegals.com.
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