GST levy on Online Gaming, Casinos, Horse Racing and the like…..

“Explore the significant shift in GST levies on online gaming, casinos, and horse racing following the 50th GST Council Meeting on 11th July 2023. Uncover the key recommendations, implications for skill-based and chance-based games, and the industry’s response. Stay informed on the evolving tax landscape for the gaming sector.”

In a very important and a long pending sensitive subject, the decision was finally taken during the 50th GST Council meeting held on 11th July 2023 which made a crucial conclusion in recommending a sketch for the Assessment of Tax liabilities under GST on the online gaming industry, casinos and the horse racing businesses. The GST Council on the basis of the report submitted by the Group of Ministers, (GoM) specifically formed for this purpose, made recommendations on the imposition of GST in respect of online gaming, as well as Casinos & Horse Racing, finally putting an end to the debate over the question whether these activities are “games of skill or chance.” Now as far as GST law is concerned, there is no discrimination any more.  Henceforth, a uniform GST rate of 28% advelorem shall apply to online gaming, casinos, and horse racing on the full-face value. These activities are in the nature of “Actionable Claim” which is part of the definition of “Goods” under section 2(52) of the CGST Act 2017 and are taxable because of the exclusion in terms of Clause 6 of Schedule-III of the CGST Act 2017.  An amendment obviously is now required to this Clause 6 of Schedule-III to add to the exclusion online gaming industry, casinos, and the horse racing businesses apart from the exclusions already available in the form of Betting, Lottery and Gambling including these activities under its scope.  As the recommendation is already there the change in the structure of the law is imminent.

2. Just to look back at what had metamorphosized over the last few months on this vulnerable subject, we realise is that the GoM’s (Group of Ministers) under the chairmanship of the Meghalaya Chief Minister, which was set up to examine issues related to the taxation of casinos, horse racing and online gaming, have broadly agreed that a 28% GST should be imposed on all three activities and in their final report to the GST Council also had proposed a levy of 28% GST on the total value of the consideration received in online gaming, including the entry fee. It further proposed that once a 28% GST has been charged on the initial purchase of casino chips, no further GST charges will apply, even on new bets made from previous round earnings.

3. To comprehend it better first, let us elaborate on the current treatment and applicability of GST on online gaming and casinos and then go on to analyse the implications of the proposed changes of course if they are passed. So, the important question is what is the Current Taxability of Online Skill Games, Casinos, and Online Lottery Under GST before this decision?

4. At present, the law under the GST regime in fact differentiates online games based on skills versus chance. A game of skill is one where the outcome is dependent on the expertise, practice, and experience of the player and not merely on chance. Some examples include rummy and fantasy sports games like Dream 11, MPL, Winzo, My 11 Circle etc., This distinction is important as skill games invite a lower tax rate applicability at the rate of 18% adv. On the other hand, the games of chance are treated on par with betting, gambling, and horse racing. Thus, they are subject to valuation under Rule 31A of the CGST Rules, 2017, which provides that the Value of such actionable claims in the form of chance to win shall be 100% of the face value of the bet or the amount paid into the totalisator and are charged to a higher rate of tax of 28% adv.  Notwithstanding that, a litigation that arises is that the line between the question of skill-based activity and chance-based activity is wafer thin in most of the cases, as can be gleaned from the recent sensational case of Games Kraft Technologies Private Limited Vs Directorate General of Goods Services Tax Intelligence (Karnataka High Court)  Writ Petition No. 19570 of 2022, Date: 11/05/2023.

5. In fact such Games can be broadly divided into three categories: –

(a) A game of pure skill:- An example under this category would be the game of Chess, Cricket and the like.

(b) A game of pure chance:- An example under this category would be ‘three cards’, video poker, roulette, craps, blackjack, and sports betting where there is no requirement for any skill.

(c) A game of mixed skill and chance. – An example under this category would be the game of rummy, bridge etc.,.

In a game of mixed skill and chance, the test of predominance is applied to categorize the game. If in a game of mixed skill and chance, the element of chance predominates over the element of skill, the game would be categorized as a Game of Chance. If in a game of mixed chance and skill, the element of skill predominates over the element of chance, the game would be categorized as a Game of Skill. Therefore, this factual exercise has to be carried out on a case-to-case basis.  So, in its ruling,  the High Court said there is a distinct difference between games of skill and games of chance; games, such as rummy, etc., as was discussed in several decisions above and particularised in the Division Bench decision of this Court in All India Gaming Federation’s case whether played online or physical, with or without stakes would be games of skill and test of predominance would apply.  Accordingly, the court said that,

“Though Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, but that in itself would not mean that lottery, betting, and gambling are the same as games of skill, a game of chance whether played with stakes is gambling and a game of skill whether played with stakes or without stakes is not gambling. Online/Electronic/Digital Rummy whether played with stakes or without stakes is not gambling. Other Online/Electronic/Digital games that are also substantially and preponderantly games of skill and not of chance are also not gambling, 

6. But earlier, the tax authorities clubbed together all such games, including rummy, into games of chance, thus inviting a higher GST tax rate of 28% adv. Now, with the recommendation made at the 50th GST Council meeting, 28% GST will be charged on full face value. i.e., the value of the chips purchased in casinos, the full value of the bets placed in Online Gaming, full value of the bets placed with bookmakers, the full value of the bets placed with totalizator in Horse Racing, and not on Gross Gaming Revenue (GGR).

7. Currently, the following GST rates are applicable to online gaming and casino earnings:

• For a game of skills, such as e-sports, puzzles, and some card games, etc., an 18% GST is chargeable under HSN 998439 and that too only on the platform’s commission/service fee or on gross gaming revenue (total stake value – distributed winnings).
• For a game of chance, including gambling at casinos, a 28% GST is chargeable under HSN 999692 on the total bet value.

8. Well now, how to calculate GST liability on Online Gaming and Casinos after the change in scenario? To comprehend this, one will have to understand how the whole process is undertaken by such entities. An online gaming platform keeps money in two ways:

• A platform fee or an entry fee (usually 10-20%) for participating in the game.
• A portion of pot money is kept aside for distribution as prize money.

So, in a Game of skill GST is levied at the rate of 18% only, on the platform/entry/rake fee charged. To illustrate, if 10 rummy card players plan on betting Rs.10,000/- and the platform charges Rs.100 per player as a platform fee. Then,

• Platform Fee = Rs.100 x10 players
• Platform Fee = Rs.1000/-
• GST chargeable = Platform Fee x 18%
• GST chargeable = Rs.1000 x 18% GST chargeable = Rs.180/-

However, for games of chance, the entire gross value will be liable to a 28% GST rate. Thus, in the previous example, on treating the game as a game of chance or treating those earnings like a casino bet, the tax incidence increases to Rs.280/-. (i.e., Rs.100 x 10 persons GST chargeable = Rs.1000/- x 28% which is 280/-)

9. Now, the final proposals submitted by the Group of Ministers (GoM) to the GST Council, have done away with the distinction of classifying online games into a Game of skill or Game of chance, as it viciously complicated tax calculations. Instead, it made an unambiguous recommendation that harmoniously 28% GST will be on full face value which is charged on online gaming, casinos and horse racing as discussed above.

10. So to put it in a nutshell,

• A flat GST rate of 28% on all online games, including skill games. Further, this rate will be chargeable on a ‘gross revenue’ basis, i.e., on the total stake value and not simply on the platform fee paid.
• For casinos, a flat rate of 28% will apply to the total value of chips bought at the time of entry. However, no GST is applicable on betting made in multiple rounds, including bets made with winnings from the previous round.

To put this into current context, if, in the previous example, the gaming platform charges 28% GST, then the tax liability becomes:

• GST assessment will be Rs.10,000 x 28%
• GST chargeable = Rs.2800/-

This means that while the platform has only earned Rs.1000/- in commission from 10 participants, it will be liable to pay Rs.2800/- in GST, which puts it into an unviable quandary.  Industry players have opined that higher GST rates will lower the playable value received by the platform users which will drastically bring down the participants in playing such games. The GoM has proposed to charge GST only on the initial money spent on entering the casinos and not on future betting made through winnings from previous rounds.

11. The next subject to be considered is whether casino and Online Gaming Service players are eligible for Input Tax Credit Claims for their (inwards) procurements of supply of goods and services. As per Section 16(1) of the CGST Act,2017, a registered person making a taxable Supply can avail input tax credit (ITC) on goods and services used in the course or furthering of their business. However, Section 17(5) of the CGST Act 2017 imposes certain restrictions for when ITC cannot be claimed which requires a careful analysis.

12. It is also very pertinent to note here that the honourable Supreme Court of India has upheld the constitutional validity of levying GST on actionable claims like lottery, betting, and gambling in the case of Skill Lotto Solutions Pvt Ltd. vs Union of India (writ petition (CIVIL) NO.961 OF 2018). The writ challenged the practice of levying GST on lottery, betting and gambling on the ground that it is not only discriminatory but also violative of Articles 14, 19(1)(g), 301, and 304 of the Constitution of India. The three-judge bench held that the levy of GST on Lottery, betting, and gambling is not in violation of any fundamental right. In doing so the court also said that such activities are ‘res extra commercium’ i.e., a thing outside commerce-that certain things may not be the object of private rights, and are therefore insusceptible to being traded; rendering such levy of GST on lottery, betting, and gambling lawful. Similarly, in the dispute of Varun Gumber v. Union Territory of Chandigarh and Others, the Punjab & Haryana High Court found that the activities organized by “Dream 11” a game of skill, as their fantasy sports games require material and considerable skills by the user and such games aren’t covered under the Public Gambling Act,1867. Apparently, similar precedence can be drawn.

Before bidding adieu……………

13. An estimate available in a validated source, says that the online gaming sector in India is booming, with revenues expected to reach a humongous Rs. 29,000-30,000 crores by Financial Year 2025. The sector stakeholders have already expressed their apprehension that the decision ignores over 60 years of settled legal jurisprudence and lumps online skill gaming with gambling activities. This decision they opine may cause irreversible damage to the entire Indian gaming industry and lead to lakhs of job losses and the only people benefitting from this will be illegal offshore platforms. Unfortunately, putting the online gaming industry in the same category as gambling (as proposed) may not be in the best interests of this thriving industry, they have opined.

14. However, one must understand the virtuous intent behind this decision. It has been fixed with the objective of discouraging young people falling into the trap and from getting addicted to online gaming and that a 28% GST would be levied on the full-face value of bets placed on online sites will desist them. The tax on online gaming companies would be imposed without making any differentiation based on whether the games required skill or were based on chance. Obviously, the decision to levy maximum tax on online gaming and casinos was not intended to kill the industry but on considering the “moral question” that it cannot be taxed at par with essential commodities/services.

15. We, of course, will need to see the fine print of notification to understand in complete, the position of levy and if any exceptions are created therein.

Jai Hind!