Explore the impact of the 28% GST imposition on online gaming, casinos, and horse racing as recommended by the 50th GST Council meeting. Understand the industry’s outrage, the blurred line between games of skill and chance, and the government’s intention to tax the value generated by these activities. Learn about the potential consequences for players and the gaming industry, and the broader implications for the taxation of virtual assets and emerging markets. Stay informed about the evolving regulatory landscape in the online gaming sector.
In the 50th GST Council meeting held on July 11, 2023, the GST Council recommended levying of 28% GST on the full face value on Online Gaming, Casinos & Horse racing, irrespective of whether these activities are considered games of skill or games of chance. This led to an outrage in the gaming industry. Resultantly, the GST Council vide its 51st meeting, stated that the decision will be enforced from Oct. 1, 2023, and will be reviewed after six months of its implementation.
The imposition of GST at a rate of 28% on the entire amount, which is declared to be with prospective effect, serves as clarification; which implies that this legal position has been in place since the inception of the GST.
There has been a lot of uproar in the industry due to the clubbing of online gaming with Casinos and horse racing. This media frenzy issue has been gaining a lot of attention on its impact and implications for the gaming industry and its players.
Currently, only collections from lottery, betting, and gambling, as excluded from Schedule III of the CGST Act, 2017, are subject to a GST rate of 28%. ‘Games of skill’ played online are considered ‘actionable claims’ under Entry 6 of the Schedule and are liable to GST at the rate of only 18% levied on the Gross Gaming Revenue (GGR) or the platform fee collected from the participants.
After this meeting, the existing line separating a game of skill from a game of chance has been removed by the government or the finance ministry.
Games of Skill or Games of Chance?
What are the factors that decide whether a particular game is a Game of skill or a game of chance?
According to the gaming industry, games of chance constitute gambling, whereas games of skill are considered to be gaming. Games are skill-based activities; hence they cannot be grouped with games of chance like betting or horse racing.
Section 65B (15) of the Finance Act, 1994 defined “betting or gambling as putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”.
Rajasthan High Court in the case of Dream11 stated that the game involves considerable skill, judgment and discretion and that success on these apps arises out of users’ exercise, superior knowledge, judgment and attention. The Court also held that ‘the element of skill’ had a predominant influence on the outcome of the game. On this basis, the Court adjudged that playing on this online gaming app constitutes a ‘game of mere skill’, which makes the game exempt from the provisions of the Public Gambling Act, 1867 (PGA). Finally, the Court held that the online fantasy gaming is a legitimate business activity protected under Article 19(1)(g) of the Constitution of India. The decision was also upheld by the Hon’ble Apex Court.
In my opinion, investing money with the hope of earning extra money should be considered a game of chance. In the same way, some individuals might refer to casinos and horse racing as games of skill while taking into account the fact that some people are skilled at card counting or making bets on horses after thoroughly researching the health, diet, prior performances, and speed of all the horses competing in a race. People may have contradictory opinions considering the stock market and share trading also operate on similar lines.
BOOMING INDUSTRY
This much-debated topic has already gained attention from the media because of the recent popularity of online fantasy gaming. Given its appeal among all age groups, expanding market size, and alluring cheap wager amounts for playing through a simple tap on a phone, more than 100 players have entered the fantasy gaming industry. Celebrities and top cricket players have started endorsing these applications.
Earlier in September 2022, the GST intelligence unit, issued a show-cause notice of 21,000 crore to Gameskraft Technology alleging evasion of GST. This was claimed to be the biggest notice in the history of indirect taxation which was later quashed by the Karnataka High Court.
The government seems to have discovered a new way to boost its revenue through this booming industry but ever since the introduction of GST, The government’s intention was very clear-
Sin and luxury goods such as Pan masala, cigarettes, carbonated beverages, and cars were always taxed in the highest bracket with some of them having an extra levy of a Cess.
Finance Minister Smt. Nirmala Sitharaman clarified in a press conference that the GST Council does not aim to end any industry, including online gaming. However, they also don’t want to send the wrong message by lowering the tax rate on such industries to the level of essential goods. The objective is to strike a balance. The Finance Minister highlighted that the focus is on taxing the value generated by these activities, rather than classifying them based on their nature.
28% GST
GST Council has decided to levy 28% GST on the full value of bets placed in online gaming deposited by the consumer.
In a nutshell, when a person deposits Rs. 100 in the Online Fantasy gaming app, 28 Rs is straight away contributed towards GST and is only left with Rs. 72 to play with. Furthermore, the Platform fee will be deducted after this.
Earlier, the gaming industries were levying GST on the platform fee and not on the full value. So when a person deposited Rs. 100 in the online Fantasy gaming app and placed a bet of Rs. 100 which includes a platform fee of Rs. 10. The 18% was levied on the platform fee of Rs. 10 which came to Rs. 1.80.
So for a Rs. 100 deposited, a person who earlier used to pay Rs. 1.80 (considering the platform fee to be 10 Rs) as GST and will now have to pay Rs. 28.
This will ultimately affect the profits made by players and disincentivize them from playing on a regular basis and eventually lead to a reduction in the participation of players.
This massive hike has sparked concerns within the online gaming sector due to its potential to disrupt the online gaming model.
This sector has been highly profitable since its introduction, but this new step will be a difficult task for these companies to make profits.
GST being an indirect tax, the gaming companies will be passing on the burden of 28% GST to their customers which can also affect the participation number which will ultimately result in low profits.
TAX ON WINNINGS
GST on winnings: Since the GST is already levied at the entry level, Winnings will not be taxed when they are used for further game play.
Income tax on winnings: As per section 194BA of the Income tax act, TDS of 30% is levied on the withdrawal of winnings (this is collected by the gaming company itself before it pays you the net proceeds of the win).
AUTHOR’S VIEW
The government has managed to maintain a win-win circumstance. If demand does not change after 28%, revenue statistics will rise exponentially, and if the demand decreases, the government can send a social message stating a decrease in addiction of online gaming. This change will automatically restrict the entry of new players into the online gaming market.
It is noteworthy that government will have revenue growth directly when a person chooses to play, regardless of whether he wins or loses. It’s just that the consumer is paying in taxes instead of filling pockets of the gaming industries with lower returns in profits. Ultimately, this will result in a loss of consumers as well as the gaming industry.
Ethically, this may have been a welcome move taking into account the people who have started seeing these platforms as means of earning livelihood through these fantasy gaming apps or keeping in mind the addiction, financial losses, and mental health issues on the Youth. But if ethics are to be considered, a ban on such apps would be better instead of such harsh measures with an eye on revenue growth alone.
The intentions of the Hon’ble Finance Minister and the Goods and Services Tax (GST) Council seem to be very clear eyeing exponential revenue growth through the new age market disrupter start-ups. Virtual Digital Assets, cryptocurrencies, and NFTs are to be next in line.
However, a more balanced and constructive outcome could have been better considering the employment and revenue this industry is capable of generating in the near future.
Author Bio
Sir,
Whether the amendment brought in by CBIC for taxing total money collected in a game is constitutionally valid in view of Karnataka HC HC judgement read with SC judgments on the issue ─Gameskraft Technologies Pvt. Ltd. v.. Directorate General of GST Intelligence (2023) 40 J.K.Jain’s GST & VR 11.
The Govt has not brought any amendment in the definition of ‘consideration’ & has not defined the trms “Game of Skill”, “Games of Chance”, betting and gambling in GDT Act.
CA Om Prakash Jain s/o J.K.Jain. Jaipur
Tel 9414300730/0141-3584043