The legal and regulatory landscape of India's online gaming industry have been fraught with several challenges. Historically, the distinction of online games into 'skill based' and 'chance based' games has been a crucial factor in determining the legality as well as the applicability of goods and services tax ("GST") rate to such games. A 'game of skill' is one which is predominantly based on the skills, learning, knowledge and expertise of the player such as chess and carrom. On the other hand, a 'game of chance' involves an element of unpredictability as its outcome is based on the luck of the player and includes games like gambling and betting. The profits earned through games of chance have been taxed at a higher GST rate of 28% (as applicable to gambling) whereas the companies providing skill-based games applied a lower GST rate of 18% on the gross gaming revenue or platform fee charged by them i.e., the fees charged by platforms from the users for its services. The tax authorities, however, have long argued that all online games including skill-based games which involve betting component or money are "gambling" and should be subject to 28% GST. This ambiguity was further compounded by several judicial pronouncements1 viewing games such as rummy, poker and fantasy sports as "games of skill" (even when such games involved money bets) with courts applying the preponderance test (or "the dominant factor test") to determine whether the game in question has a preponderance of skill over chance or vice versa.
Key changes by the Government
With a view to regulate the real money transactions in online gaming, a Group of Ministers (GoM) panel was constituted by the GST council ("Council") to examine the GST rate on online gaming industry. The Council had earlier this year, announced its decision that all online games will be subject to a uniform tax rate of 28% on the full value of bets placed in online games, regardless of whether it involves games of skills or chance. Thus, only those online games which are intended purely for entertainment and do not involve betting, gambling or any money gains, are to be taxed at 18% GST.
The Council in its 51st meetingii had, inter-alia, recommended certain amendments to the Central Goods and Services Tax Act, 2017 ("CGST Act 2017") and Integrated Goods and Services Tax Act, 2017 ("IGST Act 2017"), to provide clarity on the taxation of supplies in casinos, horse racing and online gaming. The Council also recommended that the activity of online money gaming be taxed on the initial value of deposits staked i.e., the total amount paid or payable to or deposited with the supplier, by or on behalf of the player (excluding the amount entered into games/bets out of winnings of previous games/bets) and not on the total value of each bet placed.
Following the recommendations of the Council, the Government notified the Central Goods and Services Tax (Amendment) Act, 2023 ("CGST Amendment")iii and Integrated Goods and Services Tax (Amendment) Act, 2023 ("IGST Amendment")iv. Through the CGST Amendment, definitions for the terms 'online gamingv' and 'online money gamingvi' were added to the CGST Act. Schedule III of the CGST Act stood amended to specify that the suppliers of "specified actionable claims" will be liable to pay CGST, and only the actionable claims will not be treated as supply of goods or supply of services. The new list of "specified actionable claims" means actionable claims involved in or by way of betting, casinos, gambling, horse racing, lottery, or online money gaming. Any person who organises or arranges (directly or indirectly), the supply of specified actionable claims will be deemed to be its supplier. This includes persons who own, operate, or manage digital or electronic platforms for such supply. This will be irrespective of the manner in which the consideration for supply of such claims is conveyed to the person or placed at his disposal. The consideration may include money or money's worth including virtual digital assets.
As a result of the aforesaid amendment, if a player makes a deposit of INR 100/- to wager on the online money gaming platform, under the new tax regime, GST (at the rate of 28%) of INR 28/- would be levied on the deposit whereas under the earlier tax system, only 18% GST was applicable and that too only on the platform fee. To illustrate, if the platform fee was 10% of the bet amount of INR 100/- (i.e., INR 10 in this case), the GST would be INR 1.8 (18% of INR 10) under the previous regime. Now after the CGST Amendment, a player will have to pay 28% GST on the amount deposited to play the game besides paying for the platform fee. So, in the above example, the player would only be left with INR 62/- (INR 100 which is the bet amount less the platform fee of INR 10 less GST at 28 per cent). It may also be noted that the winnings of the players from such online games are also subject to tax deduction at source (TDS) at 30%.
Additionally, the CGST Amendment has made it obligatory for all online money gaming service providers supplying online money gaming services from a place outside of territory of India to a person in India, to get registered in terms of the CGST Act. Similar amendments have been made to the IGST Act to make the offshore online money gaming companies liable to pay IGST and provide for mandatory registration of such foreign suppliers under the scheme notified under the IGST Act. If a foreign supplier of online money gaming has a representative in India, such a representative must get registered and pay IGST on behalf of the supplier. If a foreign supplier does not have a physical presence in India or does not have a representative, he must appoint a representative to pay IGST in India. In case of non-compliance, any information transmitted or hosted in computer resources for the supply of online money gaming may be blocked for public access.
The Finance Ministry in subsequent notificationvii specified October 1, 2023 as the effective date for implementation of the amended GST law provisions pertaining to the taxability of supply of online money gaming, supply of online gaming other than online money gaming and supply of actionable claims in casinos. Notably, the Council in its 51st meeting had also proposed a review of the implementation of this new 28% GST regime after six months i.e., in April 2024.
View of Stakeholders
The decision to club together all kinds of online gaming involving monetary gains at par with gambling and betting and impose a uniform tax rate of 28% on the full value of bets, has been widely criticised by the gaming industry which has viewed the distinction between a game of skill and a game of chance (gambling and betting) to be critical for the imposition of differential tax rates. This distinction has also been reaffirmed by the courts in India which have upheld online skill-based games to be lawful business activity and protected as fundamental right under the Constitution of India whereas activities like betting, gambling and lottery have been held as res extra commercium (i.e., things outside commerce or trade) and consequently not protected under the Constitution.
While the government has clarified that its intention is not to hurt the online money gaming industry, the Indian gaming industry has expressed serious concerns about its impact on the legitimate gaming businesses due to the increased tax burden which may deter the users from participating in online gaming considering the decreased returns and force the industry to shift base to offshore markets. The impact is also possibly discouraging investment from domestic and foreign players who may no longer see India as a viable gaming destination for future investments. Many online gaming companies have been served with show-cause notices for alleged tax evasions (approximately worth around Rs 1 lakh crore). Moreover, the period for which demand notices have been issued by the GST department to several online gaming companies has also been questioned as it pertains to the shortfall in payment of GST prior to the effective date of the amendments, however, the Government has stated that the demand for 28% GST on online money gaming companies is not being levied retrospectively and the amendments only provide clarity to a law that was already in force as certain online games that involved wager/betting attracted 28% GST. Notably, issuance of demand notices and imposition of retrospective taxation on the online skill-based games (akin to gambling and betting) is awaiting adjudication before the Supreme Court of India.
Conclusion
With the implementation of uniform taxation on all online money games, the Government has blurred the distinction between games of skill and game of chance which used to be the determining factor of exigibility of any online game to higher rate of GST. Notably, levy of tax on the full-face value of the bets is not in tandem with the global best practices where tax is largely levied on the gross gaming revenue i.e., platform fee. At a time when India had begun to expand its footprint in the gaming sector and attract gaming industry, the substantial increase in tax burden could spell a death knell to the interests of the online gaming industry. This approach needs to be carefully deliberated and examined by the stakeholders as this decision may have far-reaching consequences for the viability of the gaming industry, its capacity to provide massive employment opportunities, attract investments and encourage technology advancement in this emerging high growth industry, especially in the start-up space.
Footnotes
1 State of Andhra Pradesh vs K. Satyanarayana & Ors (1968 AIR 825, 1968 SCR (2) 387); Dr. K. R. Lakshmanan vs State of Tamil Nadu and ANR (1996 AIR 1153, 1996 SCC (2) 226); Indian Poker Association & Anr vs State of West Bengal & Ors (W.P.A. No. 394 of 2019) (Calcutta High Court); Poker Association (IPA) vs The State of Karnataka (WP 39167/2013) (Karnataka High Court); Avinash Mehrotra v. State of Rajasthan SLP Diary No(s) 18478/2020; Varun Gumber vs Union Territory, Chandigarh & ORS CWP No. 7559/2017 (Punjab and Haryana High Court); Ravindra Singh Chaudhary vs UOI, 2020(42) G.S.T.L. 195 (Rajasthan High Court)
2 https://cbic-gst.gov.in/pdf/Press-Release-51-GSTC.pdf
3 https://egazette.gov.in/WriteReadData/2023/248183.pdf
4 https://egazette.gov.in/WriteReadData/2023/248184.pdf
5 '2(80A) "online gaming" means offering of a game on the internet or an electronic network and includes online money gaming;
6 (80B) "online money gaming" means online gaming in which players pay or deposit money or money's worth, including virtual digital assets, in the expectation of winning money or money's worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both and whether the same is permissible or otherwise under any other law for the time being in force;';
7 https://gst.kar.nic.in/Documents/NOTIFICATIONS/centraltaxnotification4930923.pdf
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