Why Online Gaming Companies In News?
GST evasion of about Rs 23,000 crore by gaming companies between April 2019 and November 2022 is being investigated by the tax officers, Minister of State for Finance Pankaj Chaudhary said on Monday. In a written reply to a question in the Lok Sabha, the minister said the Enforcement Directorate has attached proceeds of crime of more than Rs 1,000 crore in several cases related to Cyber and Crypto assets frauds wherein online gaming etc have been used for siphoning the proceeds.
With advent of technology, availability of uninterrupted internet and smart mobile phones clubbed with series of lock-down during the recent pandemic gave early birth of Online Gaming industry India. Online Gaming is latest and youngest entry in the world of technology. Online Gaming is seen as disruptive market considering the size and scale across the world.
The market size of global Online Gaming estimated at USD 196 Billion in 2021 and is expected to reach USD 221 Billion in 2022. With CAGR of 13% from 2022 to 2030 the revenue of Online Gaming is expected to be USD 584 Mn by 2030.
India currently has more than 400 Gaming companies and 420 Million online gamers, second only to China. The Game users are projected to increase from 420 Million to 657 Million in 2025 – which is over 50% increase. The Indian online gaming industry is growing annually at 30% and is one of the fastest growing segments on digital media and entertainment sector.
In this growing sector, Dream11 (owned by Dream11 Fantasy Private Limited), Mobile Premier League and Games24x7 are three Gaming Unicorns of the Country. Dream11 is one of the most popular fantasy apps globally, with nearly 10 crore users on its platform.
Online games refer to games that are played over some form of computer network, most often the Internet. Online games can range from simple text-based games to games incorporating complex graphics and virtual worlds populated by many players simultaneously.
Under Online Gaming, the gaming company charge from the payer/participants an amount which has two elements – one Platform Fees or Entry Fee, which is about 15% to 20% of the amount collected. The balance amount is Pot Money or Price Money collected from each player/participant is pooled in as Escrow Account which ultimately gets distributed amongst the players /participants as Prize Money or Pot Money immediately upon conclusion of the game. So , it is beneficial for both the parties the online gaming company and participants to have a maximum number of participants in a single round of game.
GST of Platform Fees: There is largely a consensus between the industry and the taxman that the GST on the platform charges retained by the OGC will be applicable. The bone of contention yet to be resolved is about the rate of GST which further depends on the nature of online games, whether it is a game of chance or a game of skill. Game of chance attract higher rate of GST than the game of skill.
GST on POT Money of Price Money: Pooled Money / Prize Money kept in Escrow Account, which is a higher amount and have no clarity on its taxability and therefore remained in controversy for quite some time under GST. The GST Council in its 47th Council meeting also directed that the Group of Ministers on Casino, Race Course and Online Gaming re-examine the issues in its terms of reference based on further inputs from States and submit its report within a short duration.]
Before we delve upon whether Online Games are ‘gambling’ in nature or not, we must understand the provisions of Constitution of India relating to that. As per Entry 34 in List II of the 7th schedule of the Constitution of India “Betting and Gambling” are State subject. Accordingly, the State Governments are empowered to make laws for regulation / ban of Betting and Gambling in their states. Most of the States have banned Betting and Gambling, while a handful of states have framed laws to regulate Betting and Gambling activities in state.
There is a central legislation – i.e. Public Gambling Act, 1867 enacted during the pre-independence era which prohibits any games of chance and probability except lotteries. As per this Act, owning, keeping and being found in a common gaming-house is prohibited. However, Section 12 of the said Act excludes “games of skill” from its ambit. And this is the reason why all gaming companies arduously making efforts to somehow manage to showcase their respective games as game of skill and not a game of chance.
Presently the whole issue of GST on online gaming companies revolves around the criteria to differentiate the 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. This distinction is important as skill games invite a lower tax rate applicability.
Whereas games of chance are treated similarly to betting, gambling, and horse racing. Thus, they are subject to Rule 31A of the CGST Rules, 2017, which charges a higher GST rate.
Relevant Extract of Rule – 31A , Central Goods and Services Tax Rules, 2017
Value of supply in case of lottery, betting, gambling and horse racing
31A. (1) Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall be determined in the manner provided hereinafter.
(2) The value of supply of lottery shall be deemed to be 100/128 of the face value of ticket or of the price as notified in the Official Gazette by the Organising State, whichever is higher.
Explanation.—For the purposes of this sub-rule, the expression “Organising State” has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010.
(3) The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator.
Insight: On reading the above rule it is clear that it is applicable only on four types of actionable claim- i.e., lottery, betting, gambling and horse racing, which means it would not be applicable for online gaming.
However, an issue arises as the line between skill, and chance can be thin in some cases, as can be gleaned from the recent case of Gameskraft Technology. The tax authorities clubbed together all its games, including rummy, into games of chance, thus inviting a higher GST tax rate.
Though Online Gaming Industry is there in India for more than a decade now, but its business model and functionality has gone through legal scrutiny by way of Criminal Public Interest Litigations in number of cases. Extract of Judgements in the recent past which shaped the future of online gaming is mentioned below:
Playing of Online games involves exercise of superior knowledge, judgment and attention of the participant. The judgment of participant in forming team of players determines the success or failure of the game. Hence, Dream11’s (respondent in this case) Online games are exempt from the provisions of the Public Gambling Act 1867, as they require a substantial degree or preponderance of skill, which affects the outcome of game played by the participant.
The order of Punjab & Haryana High Court in Varun Gumber’s case (supra) was challenged before the Supreme Court in Special Leave Petition (Criminal) Diary [SLP Diary No. 27511 of 2017], which was dismissed by the Supreme Court in September 2017.
Online Fantasy Sports Gaming are not gambling services, rather are games of skills, hence, respondent company’s activity of conducting Online Fantasy Sports Gaming falls under entry 998439 having applicable rate of GST at 18 per cent.
In case of Online Fantasy Sports Gaming being conducted by respondent, GST would be applicable only on amount received and retained by respondent towards platform fee being amount collected for supply of goods/services and not on entire money which is put at stake by player.
Amounts pooled by players for entering a contest in escrow account of respondent company is an actionable claim that is to be distributed to winners and since activities of respondent do not amount to lottery, betting and gambling, said actionable claim would fall under Entry 6 of Schedule III under section 7(2) and rule 31A which is only restricted to lottery, betting, gambling or horse racing in a race club, hence, would not be applicable.
Therefore, this activity or transaction pertaining to such actionable claim can neither be considered as supply of goods nor supply of services, and is thus clearly exempt from levy of any GST.
In this case, The High Court of Bombay relied heavily on the analysis made by the Punjab & Haryana High Court in the Varun Gumber Case (Supra) held that considering the scale of knowledge, judgement and attention required by payers, Online fantasy games are undoubtedly a game of skill and not game of chance and therefor activities and offerings of Dream11 were permitted in law as they have protection guaranteed under Article 19(1)(g) of the Constitution of India and were not illegal operations of gambling or betting in the guise of online fantasy sports gaming.
Similarly, Rajasthan High Court also affirmed the identical view in case of Chandresh Sankhla V. Sate of Rajasthan [D.B. Civil Writ Petition No. 6653 of 2019, dated 14-02-2022] if February 2020 and in Ravindra singh Choudhary V. Union Of India  in October 2020.
In the meantime, the State of Maharashtra separately filed a Special Leave Petition in the Supreme Court, challenging the decision of the Bombay High Court in the State of Maharashtra v. Gurdeep Singh Sachar [SLP (Crl.) Diary No. 42282 of 2019], which was heard by the Supreme Court in March 2020. The Supreme Court has now stayed the orders of the Bombay High Court in the Gurdeep Singh Sachar’s case (supra) and issued notices to all the parties in the Gurdeep Singh Case for hearing their contentions afresh. Decision of this case and in combination with other case will decide the future course of action in the online gaming arena in India.
Scenario Under GST And GamesKraft Technologies Case
Online Gaming is service in nature. And if go with the decision of Bombay High Court in the case of Gurdeep Singh Sachar (supra) then the services provided by gaming company falls within the definition of supply under the heading of “998439-Other on-line content nowhere else classified”
The Explanatory Notes to the Scheme of Classification of Service under the Service Account Code (SAC) 998439 read as under :
“998439 – Other on-line content nowhere else classified.
This service code includes games that are intended to be played on the Internet such as role-playing games(RPGs),strategy games, action games, card games, children’s games; software that is intended to be executed on-line, except game software; mature theme, sexually explicit content published or broadcast over the Internet including graphics, live feeds, interactive performances and virtual activities; content provided on web search portals, i.e. extensive databases of Internet addresses and content in an easily searchable format; statistics or other information, including streamed news; other on-line content not included above such as greeting cards, jokes, cartoons, graphics, maps.
It is here important to note that above service code entry does not include : online gambling services that squarely falls under the heading “999692”.
Assuming the entry fees or platform fees for online gaming falls under the service code “998439” than all such services will attract the GST rate of 18% as prescribed in the rate notifications.
The taxability of the second limb of the total amount that is Prize Money which is generally kept in an Escrow account and distributed among the winners, is quite difficult as there are difference of opinion among the stakeholders. In fact, in its judgement by the Hon. Bombay High Court in the case of Gurdeep Singh Sachar held the prize money as an actionable claim under the GST Act. As mentioned earlier actionable claim except under CGST Rule 31A is exempt from the GST being fall under entry 6 of Schedule III.
Further being this judgement is already challenged by the Hon. Maharashtra Government before the apex court and which is still pending for the final hearing. So the case is still open for all the stakeholders to draw the conclusions best to their interest, as GST department did in the Gameskraft Technologies case and issued the show cause notice to the company of highest ever demand in the GST law till date.
It is important here to note that since the GST Act in itself does not levy any tax on the actionable claim, the rule 31A does not itself can override the GST Act without any statutory backing under the GST Act.
Games Kraft Technologies Case
In 2022 the Intelligence wing of GST department made an investigation at business premises of Bengaluru-based online gaming company, Gameskraft Technology Private Ltd (GTPL), where Intelligence wing noticed discrepancies in invoicing for not depositing GST for the period between July 2017 and June 2022 on total Gross Revenue of about Rs 77,000 crore and issued the biggest ever Show Cause Notice (SCN) in the history of indirect taxation for Rs.21,000 crore along plus interest and penalty on the Company. The department in the SCN has alleged that GTPL is involved in promoting betting by allowing its players/participants to place bets in the form of money stakes on outcomes through card, casual and fantasy online games. In this way department intends to treat Online gaming as gambling and betting by way issuing SCN to GTPL at 28% of Gross Revenue.
The GTPL contested this notice before the Karnataka High Court and vociferously challenged that it host on its platform games of skill and not game of chance and therefore not to be treated at promoting gambling in the society. The company vehemently challenged the notice and filed the petition that all the games are fall under the purview of Game of Skill and therefore outside the provisions of section 12 of Public Gambling Act, 1867.Further it also took the shelter of detailed guidelines laid down by the Hon. Supreme Court in the case of K.R. Lakshmanan V. State of Tamil Nadu  laid down the differentiating criteria to held which activity falls under gambling/betting or not. The Court further held that despite their being an element of chance in a particular game, if a game is predominantly a game of skill, it would nevertheless be a game of skill rather a game of chance.
So, it is a long road ahead to trudge before the industry stakeholder to decide the legality of the whole issue. Now all the eyes are on the Hon. SC to decide these pending case so that the legality of these get clear once for all. It was also expected that the GST Council the apex decision making body under the GST Act in its 48th meeting held on 17th December 2022 will try to make the picture clear about the various ambiguities on the tax rates inter alia on other issues faced by the industry players in online gaming. But contrary to all expectation the council did not ponder over all these issues and keep the status quo for the online gaming legality issue. Further the council is yet take the cognizance of the interim report submitted by the Group of Ministers (GoM) about the legality of online gaming and tax rates on online games. The GoM also ensured that it will held further consultation with industry players and various states where lottery and casino games are legal games.
Last But not the Least
Technological revolution which the human kind witnessed in the last one decade have changed the very basic way of operating by Industry. Before these changes encompasses every activities the government must be proactive in its role of law making for the benefit of the society and streamlining the whole process. The government cannot afford to be a follower of the changes it must spearhead the changes with futuristic law making which laid down the path for the 5 Trillion economy of India. It is advisable and in the interest of the country to fix these legality issues on online gaming once for all to strengthen the confidence of foreign investors. Now it is up to GST council and Supreme Court when it sort out the gaming industry conundrums.
Disclaimer: All efforts have been made to incorporate the relevant amendments till 27th December 2022 and to keep the article error free. Please take professional advice before arriving at any conclusion, this article is only for the information purpose.
Author: CA Sourabh Singla (can be reached at firstname.lastname@example.org)