Gaming: GST doldrum and riddle continues

Over the past five years, the proliferation of smartphones, cheap data plans and the convenience of digital payments have led to the establishment of a thriving gaming ecosystem. The booming gaming sector has generated a lot of interest from investors, content creators and owners, and has created new opportunities to monetize the intellectual property rights and technology-based platforms. Higher disposable income and spending on entertainment have provided many opportunities for innovation in the sector. Natural progression can be seen in the world of non-fungible tokens, blockchain technologies and metaverse-based games.

Marketing opportunities in India have witnessed an exponential growth in the number of gaming users of 300 million during the lockdown, representing an average growth rate of 28 percent year-on-year.

The emerging gaming industry has faced multiple regulatory and legislative hurdles from time to time. Several High Courts have given relief by lifting bans on online games of skill. However, the tax conundrum remains for the gaming industry. The declining revenue base and the expiration of the period for paying compensation termination has led the government to turn its eyes to gambling and crypto taxes for increased tax collection with adjustment of rates and related provisions.

After the meeting of the Group of Ministers (GoM) on casinos, racecourses and online gaming on May 18, 2022, the GoM informed about their consensus on an increase in the GST rate from 18 percent to 28 percent for all online games along with races and casinos. In light of the above recommendation, it becomes relevant to discuss the impact on the sector.

Constitution of GoM on casinos, racetracks and online gaming

In the year 2019, in its 37th and 38th meeting, the GST Council deliberated extensively on critical GST issues of categorizing and determining the valuation of supplies made by the online gaming industry, including casinos and racecourses. Thereafter, the council considered establishing the GoM to exclusively examine the issues of this industry on the GST rate along with the value on which GST will be charged i.e. on gross gaming revenue (GGR) or on an ad hoc percentage basis/ assumed value or on entry fee/face value/wager amount collected or otherwise. Consequently, a GoM was established in May 2021 and was reconstituted in February 2022.

GST is a transaction-based tax and may be levied against a fee charged for facilitating the games

A game platform facilitates a game of skill between the players. Gaming operator provides services to players related to providing a platform for participation and giving a chance to win in a game based on pre-published rules. The platform offers a virtual playground against payment of platform fees. For the services provided by the games of chance provider, the consideration is received in the form of platform fees (GGR). The GGR received by the gaming operator constitutes a fee u/s 2(31) and the GST is payable on the GGR only for facilitation services provided by the gaming operator in accordance with Section 7 of the CGST Act. This is in line with international GGR taxing practices.

The prize pool for a game of skill constitutes an actionable claim, with the exception of lotteries, betting and gambling. Thus, in the absence of supply, GST is not levied on the prize pool contribution distributed among the winner(s) for a game of skill. The prize pool does not constitute u/s 2(31) consideration for any deliveries by the gambling operator, as it is not permanently held by the gambling operator, nor is the gambling operator’s income.

GoM’s Tariff and Valuation Proposal: Harmful to India’s Online Gaming Sector

Keeping skill and chance games in line and taxing both games with a 28 percent sin rate will be detrimental to the emerging Indian online gaming sector. Concurrent change in the GST rate and the valuation mechanism for levying GST from platform services to entry fees will adversely reduce the prize pool to be distributed among the winners by approximately 30 percent.

The proposal to levy GST on the initial bet and play amount is not clear about the valuation to be used for different forms of play and will lead to different end results. GST is a transaction-based tax, levied on the supply of goods or services for a consideration. The GGR that the gambling provider receives may only be the consideration for the provision of services. Charging the entire entry fee or wagering amount would be a departure from the principle of taxing only the consideration for the provision of services. This means that tax is levied even on a claim that can be claimed in the form of a prize pool to be distributed among the winners, if the service element is missing. The same has also been considered by the Karnataka High Court, which ruled that Rule 31A(3) of the CGST Rules is ultra vires the Enabling Act.

The Council should adopt international practices regarding the valuation of GGR rather than set the assumed value or entry charge. The GGR varies from game to game and format to format, so a higher assumed value will be detrimental to the gaming industry directly affecting the prize pool for the users and the gaming operator’s revenue. Estimated value will reduce innovations and affect the players by artificially creating tax uniformity between different game formats. Any assumed value should be in accordance with realistic practice followed for each format. GoM’s proposal to levy tax on entrance fees or the amount of the bet is not in line with current international practice to tax the GGR.

It is important for the GST Council to establish an appropriate GST rate and valuation mechanism. The established legal case law of the Supreme Court that treats games of skill differently from games of chance should be considered by the GST Council before setting GST rates and valuation mechanism. Taking presumed value or entry price as supply value will hinder innovation, push the organized gaming industry into a gray market, encourage onshore gaming operators and discourage new entrants and operators in the sector.

The GST Council’s final decision on the GST rate and valuation issue will decide the fate of gaming startup platforms and the future growth of the gaming industry in India.

(Authors are L Badri Narayanan, Executive Partner and Asish Philip Abraham, Partner Lakshmikumaran & Sridharan Lawyers.)

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