28% GST: A Gut Punch to the Gaming Industry?

Background and recent developments

In recent years, the gaming industry in India has undergone a remarkable and rapid growth, solidifying its position as one of the world’s largest and most significant gaming market globally. The industry has attracted substantial foreign investment during this period and is projected to continue its robust growth with a CAGR of over 25%.

In December 2022, the central government amended the Government of India (Allocation of Business) Rules 1961 to make the Union Ministry of Electronics and Information Technology (MeitY) the nodal ministry for matters relating to online gaming. In April 2023, MeitY notified the Online Gaming Rules to regulate online gaming by self-regulated bodies designated by the central government[i].

On the direct tax front, new rules were introduced for online gaming platforms to deduct tax deducted at source at 30% on net winnings from any online gaming platform to a user account.

GST quandary

The sector is again in the limelight and facing a major setback with the Goods and Services Tax (GST) 50th Council meeting decision, which proposed to impose a uniform GST levy of 28% on the full amount, treating it at par with lottery, horse racing, and gambling.

The decision of the Council has not settled well and has raised a furore throughout the online gaming industry. Meanwhile, the Council has defended its decision by guising it as ‘a well-thought-out preliminary measure’, which rests on the principles of morality and fairness.

This issue has been a hot topic that garnered momentum after the judgement in the case of Gameskraft Technologies wherein the Karnataka High Court categorised rummy as a game of ‘skill,’ basis which the demand of around INR 21,000 crores in tax, interest, and penalty was quashed.

In this backdrop, the Council constituted the GoM on casinos, race courses, and online gaming to analyse the issues faced by the sector, which submitted its first report in the 47th GST Council meeting that recommended that 28% GST shall be levied on the full value of the contest entry amount and was compelled to revisit its recommendation. The final report was submitted in December 2022 (details of which are unavailable in the public domain).

Game of skill vs. game of chance

In order to establish a context for discussions or decision-making related to gaming, it is essential to have a thorough understanding of the gaming structure. Online gaming may be differentiated as a game of skill or a game of chance.

• Game of skill: A game of skill is one where the outcome is primarily determined by the skill, knowledge, experience, or strategy of the players involved. In such games, the players’ abilities to make decisions, use tactics, and employ their expertise substantially impact the result. Such games may be related to sports, educational games, tournament-based games, etc.
• Game of chance: On the other hand, a game of chance is one where the outcome is primarily determined by luck or random events. The players have little or no control over the results, and winning or losing is based on elements beyond their influence.

It includes games like horse racing, betting, gambling, or lottery.

Origins and developments thereon

The Public Gambling Act, 1867, governed public gambling and the keeping of gaming houses in undivided India. The Act explicitly carved out an exception for games of skills and excluded them from its purview. The levy of tax on betting and gambling was within the sole domain of the Provinces in terms of the Government of India Act, 1935, and, in a similar fashion, subsequently within the purview of the states vide Entry 34 of the state list. Fourteen states and UTs, including Haryana, Himachal Pradesh, Punjab, Madhya Pradesh, etc., adopted the Act, and the rest had their enactments dealing with gambling and gaming houses prohibition.

The distinction between the ‘Games of Skill’ and ‘Games of Chance’ was necessary, as the former does not fall within the definition of lottery, betting, and gambling.

Even under the GST regime, a specific distinction is carved out for online games in the nature of betting or gambling, which are subject to a tax rate of 28% applied on the full-face value of the bets placed, in terms of Rule 31A of the CGST Rules, 2017.

Games that do not fall in the above criteria are taxed at 18%. These are classified under the HSN code 9983439 as the entry, which includes games played on the internet.

Business model and related GST positions taken by industry players

The gaming mechanism typically operates in the following manner –

• Multiple players participate in a specific game or tournament by depositing money or paying an entry fee.
• The gaming companies deduct their share through a platform fee, commonly called ‘Rake,’ which is recognised as revenue from operations or Gross Gaming Revenue (GGR).
• After deducting the platform fee, the remaining net amount is then distributed to the winning participant or player.

Currently, the operating method is largely uniform across the online gaming industry. The players deposit money through the authorised payment gateways, which is then divided, with a portion allocated as a platform fee or GGR to facilitate the gameplay on the gaming platform. This platform fee is subject to a GST rate of 18%, treated as a service.

The amount earmarked for the prize pool is generally held by a sister-concern trust of the online intermediary or a third party in a fiduciary capacity. It is then fully distributed to the eventual winner.

This distribution of the prize pool falls under the definition of an ‘actionable claim’ and is considered outside the purview of the GST levy. The Bombay High Court[ii] has upheld this view, affirming that the prize pool qualifies as an actionable claim, making transactions related to it exempt from GST.

Furthermore, the mere act of distributing the prize money is regarded as a transaction involving money and not a supply of goods or services, thus falling outside the scope of GST levy since there is no inherent provision of a service in this context.

This can be illustrated via an example where five players are participating in a game with a bet amount of INR 1,000 -

Effect of the proposed amendment

With the proposed amendment, GST will be applicable at 28% on the entire amount of bet placed. Let us analyse the effect on the net winnings in the proposed scenario using the same illustration -

Accordingly, given the above, it may be interpreted that there is a significant increase in the GST levy, nearly 14 times higher compared to the current scenario, assuming all other factors remain the same. Consequently, the net win for the players is considerably reduced.

Global scenario

The taxation models adopted by most countries are mainly predicated on imposing a tax on GGR. Countries like the UK, Austria, Malaysia, Australia, Singapore, Italy, and the Czech Republic impose a tax on GGR ranging somewhere between 20% and 22%,

On the contrary, countries like France, Germany, Portugal, and Poland impose taxes on contest entry amounts. It may be noted in such scenarios that tax rates are subsidised, ranging between 3% to 15%, in order to reduce the overall tax burden for the ultimate consumer. However, there is growing trend among these countries to shift towards taxing GGR instead of the full amount.

With the proposed amendment, India will become the only country to levy tax at the highest tax slab and on the entire amount of bet placed. 

Conclusion

The Council has overlooked six decades worth of judicial precedents by negating the differentiation between games of skill and games of chance. The industry, in unison, has labelled the Council’s decision as egregious, which will have irreparable damage and would be akin to killing the goose that lays the golden egg. Notably, the industry was never against the imposition of tax and expected that the tax structure would be in tandem with global standards. The states of Goa and Karnataka, too, have opposed the decision, which would have severe implications for tourism and foreign direct investment.

Primarily, the moral intention of the government, with which it has propounded the tax levy, cannot be questioned. Almost 130 gaming companies have jointly signed and written an open letter to the government to reconsider this decision, as it will adversely affect the ability of the sector to grow, lead to job losses and business closure, along with hampering investment opportunities in India. The upcoming monsoon session of the Parliament will be crucial to observe how these amendments unfold and the potential impact they may have on the gaming industry.

This article first appeared in Taxsutra on 27 July 2023.

[i] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1918383
[ii] Gurdeep Singh Sachar v Dream11 Fantasy Pvt. Ltd [TS-496-HC(BOM)-2019-NT]