Applicability of indirect taxes on betting, lottery, casinos, online gaming have been a matter of dispute since the service tax era, and now continuing in the Goods and Services Tax (GST) regime. The issue of whether these can be classified as ‘game of chance’ or ‘game of skill’ has been settled by the Indian Courts thereby clearing the doubts on GST rate applicable to online gaming; game of chance such as betting, lottery and casinos attract GST @28%. Accordingly, services provided by online gaming operators now attract GST @18%. However, there is still ambiguity on the valuation of these services, i.e., what is the transaction value on which the GST @18% should be levied?
The issue has been explained below with an illustration:
A user is required to pay an entry fee for playing an online game – say fantasy cricket or fantasy football. A portion of this entry fee (say 10%) is retained by the online gaming operator as its service fee which is the revenue for the platform. The balance 90% is retained as a prize pool and distributed to the winners. Currently, the industry position is that GST should be paid on the 10% service fee and the balance 90% should be treated as actionable claims on which no GST is payable.
The issue under discussion and dispute with the tax authorities is whether GST should be deposited only on the 10% (service fee) or on the entire 100% (including the price money). This difference in GST liability is significant and can certainly be a game changer for several online gaming start-ups. Multiple representations have been made by stakeholders that the online gaming entities are only paying taxes on the amount of fee being retained by them, and not on the total value of the bet being made. Demands have been made for clearer provisions so as to ensure that appropriate means of valuation of services are adopted by these entities.
To address this problem, the Ministry of Finance had in May 2021, pursuant to a decision taken by the GST Council, constituted a panel of Ministers from various States to examine the present method of valuation of services and make recommendations to the GST Council. The panel was responsible for:
· determining the efficacy of the present taxation framework for certain services provided by casinos, racecourses and online gaming companies in light of the recent Court orders;
· examining whether any changes are required to the present mechanism of valuation of services and if there is a need to adopt newer means for valuation;
· provide guidelines for the administration of the new method of valuation, if required;
· determining the impact of the proposed valuation of services, if any, on other similarly placed industries such as lotteries.
Recent developments:
The panel which comprises a Group of Ministers (GOM) held a meeting on 02 May 2022 and is of the view that the existing distinction between a ‘game of skill’ and ‘game of chance’ should be removed. If this recommendation is accepted by the GST Council, it is likely that the GST rate on ‘games of skill’ will increase from the current 18% to the higher bracket of 28% (as applicable to ‘game of chance’ such as betting, lotteries). As regards the taxable base on which GST should be levied, the discussion is continuing and a decision may be taken in the next meeting, to be held in the next 2 weeks.
The online gaming industry in India is at a nascent stage and saddled with multiple unresolved issues from a tax and regulatory perspective. It is important to assess whether any onerous tax obligations may adversely affect further growth of this industry. Further, if game of chance and game of skill attracts similar GST rates, the implication of such a move may unknowingly increase liabilities of digital platforms (video / live streaming apps) involved in conducting competitions. Keeping the above in view, it is recommended that prior to bringing digital business models based on ‘game of skill’ within the purview of the higher GST rate, the GOM should take into account the adverse effect such a move may have (a) on existing online companies in India whose business models are based on ‘game of skill’; and (b) on technology innovation in India as gaming companies are enablers in creating high end experiences for its users using latest innovations in technology.
If you need any further information on the above, please feel free to mail Deni Shah – Head, Global Trade and Tax Practice at deni.shah@acuitylaw.co.in .
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