By Roland Lander
India’s online gaming industry has flourished in recent years with the emergence of new startups and has seen tremendous positive economic impact. This nascent sector in India has gained considerable momentum thanks to the Prime Minister’s “Digital India” initiative which promotes Internet access for citizens at affordable rates, the penetration of mobile use across social barriers and demographics and India’s enthusiasm to embrace and adapt to online gaming platforms. However, despite the encouragement and positive feedback received from the government, the industry awaits a clear judgment on the GST restructuring and online gaming tariff rationalizations.
To determine whether or not GST applies to the total value of the transaction, which includes the prize money, or the net commissions (revenues) that accrue to gaming companies, the GST Board and the Ministry of Finance have formed a Group of Ministers (GoM). Along with this, the GOM is also responsible for making recommendations on the applicable GST rate. However, the committee which was formed last year in May was disbanded and a new one was formed earlier in February 2022.
Since there is huge potential in this booming sector, there is an urgent need to look at the GST levied on the industry.
Currently, services provided by online skill gaming platforms are classified under service accounting code 998439 of the GST service classification and are subject to 18% on the gross gaming revenue (GGR) for the service provider. , while gambling attracts 28% of GST.
Additionally, the Contest Entry Amount (ECA), which normally includes the Platform Fee or GGR, is usually between 5% and 15% and the prize pool which is between 85% and 95%. In most games, the average ticket size is between Rs. 25 and 35.
To put it simply: in real money games, players have to pay an entry fee to join a gaming tournament and the total amount collected in this process minus the platform fee is called the prize pool money. Different companies deal with different models of holding the prize pool money. In some cases, platforms might choose to keep money received in a separate electronic ledger by third-party service providers or payment gateways, wallets, etc. This pooled amount is then distributed among the players as prizes and the company earns a percentage (5% – 15%) of this amount as a platform fee.
Major global regulated markets, including the UK, most EU countries and Nevada, New Jersey in the US, impose a tax on gross gaming revenue at the rate of 15% to 20%.
In addition, Rule 31A of the CGST Rules 2017 (“Rule 31A”) deals with the valuation of the offer of actionable claims in lottery, betting, gambling and horse racing, so as to fall within the rigors of Rule 31A which applies, according to said Rule, only to activities involving “a chance of winning in betting, gambling or horse racing”.
Rule 31A(3) reads: “(3) The value of the offer of an actionable claim in the form of a chance of winning in a bet, game or race of horses in a racing club must be 100% of the face value of the bet or the amount paid into the totalizer.
Since Rule 31A uses the word “luck” before describing activity, it is clear that said rule does not apply to online games based on skill. This therefore means that Rule 31A applies strictly to games involving betting, gambling or horse racing etc.
Games of skill are not explicitly covered by the current GST framework and tax authorities sometimes overlook the difference between games of skill and games of chance. This clear distinction is essential because in the case of lottery, betting, gambling and horse racing, 100% of the face value of the bet or the amount paid into the totalizer is taken into account for the GST.
The “actionable claim other than lottery, betting and gambling” is covered by entry 6 of Schedule III of the 2017 CGST Act. is an actionable claim, so it is exempt from the GST charge.
Therefore, on these rows, only the GGR or platform fee should continue to be considered as the value of the offer. Also, if there are other formats or revenue models followed by the platforms, such as entry fee, subscription fee, game revenue, etc., GST should be applicable on the amount received by the platform for the provision of its services.
Previously, in scholarly judgments, the Rajasthan High Court, Bombay High Court and Punjab and Haryana High Court (upheld by the Supreme Court on Appeal) struck down state laws that criminalized gambling online involving skills.
We urge the government to disambiguate and clarify that Rule 31A is not intended to cover games of skill and therefore is not applicable to any form of online gambling where the superior skill and technical knowledge of a player are dominant. Alternatively, we recommend that the government also consider creating a separate rule specifically for skill-based games where the GST rate only applies on platform fees, only in the case of any other platform online providing goods and services.
We recommend that in cases where the game company’s revenue model includes subscription fees, in-game revenue, etc., GST should only be applicable on the amount received by the platform. Additionally, skill-based games should ideally be taxed at 18% on platform fees, as higher tax rates can impact the growth of the industry.
Any attempt to levy GST on the total bet value is bound to change player behavior and compliance and will not work in the interests of the gambling industry or the government. This may consequently hamper the upward trajectory of this booming industry and could encourage the closure of businesses in the sector. The online gambling industry needs a GST regime that can protect and promote the segment that is home to over 900 Indian gambling startups.
The author is the CEO of All India Gaming Federation
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