Issuance of Notices under GST to Online Gaming Companies: Understanding the Impact of Recent Amendments
♦Online gaming companies have recently been receiving pre-SCN notices in Form GST DRC-01A, alleging that games involving a combination of skill and chance, such as rummy and poker, are predominantly games of chance. Consequently, these games are treated as ‘betting’ or ‘gambling’ activities and subject to GST at a rate of 28% on the full betting amount. These notices have gained momentum following amendments in the GST law related to the online gaming sector and a stay by the Supreme Court on the Karnataka High Court’s judgment in the Gameskraft case.
♦ The crux of the issue lies in determining whether online games, where both skill and chance are involved, should be categorized as games of chance or games of skill. Some states, like Nagaland and Meghalaya, recognize games like poker as ‘games of skill’ and exempt them from prohibitions under gaming laws. This article delves into the current GST position for online gaming before the amendments and explores the impact of recent changes in GST law on the online gaming sector.
♦ Let us first understand the current position under GST in case of online gaming i.e. before the amendments are bought into effect. At this juncture it is pertinent to understand the following relevant provisions:
- Schedule III to CGST Act- Entry 6 of this schedule covers actionable claims other than lottery, betting and gambling. Since the activities covered under Schedule III neither be treated as supply of good nor supply or services, any activity that qualifies to be an actionable claim shall be outside the purview of GST except for lottery, betting and gambling.
- Rule 31A of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘CGST Rules’) being a non-obstante clause provides for valuation of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club. The said rule provides that the value shall be 100% of the face value of the bet or the amount paid into the totalisator.
♦ As can be seen from the above that only lottery, betting and gambling are covered under GST since the same are specifically excluded from Schedule III. Hence, the contention of the department has been that online money games would get covered under this exception and therefore are subject to GST. While the actual nature of the game i.e. whether it is a game of chance or game of skill is not looked into detail, notices are issued on a preliminary understanding that most of the games where money is at stake is a game of chance and therefore the same is outside the purview of schedule III.
♦ If department’s view is considered, the value of supply in case of online games involving money would be 100% of bet amount. Currently, the gaming companies are discharging GST on platform fee charged to players. Hence, there will a substantial increase in the GST liability if online money games are treated as ‘betting and gambling’.
♦ We shall now discuss the amendments in GST law pertaining to online gaming sector. The same have received assent of the President on 18 August 2023. These amendments are summarised as below:
(i) The terms ‘Online gaming’, ’Online money gaming’, ‘Specified actionable claim’ and ‘Virtual digital asset’ are defined. Further, definition of ‘Supplier’ and ‘Online information and data access or retrieval services’ (OIDAR) are amended.
> ‘online gaming’ means offering of a game on the internet or an electronic network and includes online money gaming.
> ‘online money gaming’ means online gaming in which players pay or deposit money or money’s worth, including virtual digital assets, in the expectation of winning money or money’s worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both and whether the same is permissible or otherwise under any other law for the time being in force.
> ‘specified actionable claim’ means the actionable claim involved in or by way of—
(i) betting;
(ii) casinos;
(iii) gambling;
(iv) horse racing;
(v) lottery; or
(vi) online money gaming
> ‘virtual digital asset’ shall have the same meaning as assigned to it in clause (47A) of section 2 of the Income-tax Act, 1961
(ii) A proviso is inserted in 2(105) of the CGST Act i.e. Definition of “supplier”. It provides that a person who organizes or arranges supply of specified actionable claims, including a person who owns, operates or manages digital or electronic platform for such supply, shall be deemed to be a supplier of such actionable claims
(iii) Para 6 of Schedule III to the CGST Act is amended to replace the term ‘lottery, betting and gambling’ with the term ‘specified actionable claim’.
(iv) A new clause (xia) is inserted in Section 24 of the CGST Act to provide for mandatory registration of the person supplying online money gaming, from a place outside India to a place in India.
(v) Section 2(17) of the IGST Act is amended to exclude ‘online money gaming’ from the definition of online information and data access or retrieval (OIDAR) services
(vi) Proviso to Section 5(1) of the IGST Act has been amended to provide that in case of import of notified goods, the levy of integrated tax (IGST) shall be as per Section 5(1) of the IGST Act instead of Section 3 of Customs Tariff Act, 1975 read with Section 12 of Customs Act, 1962.
(vii) A new Section 14A is inserted in the IGST Act to provide for following special provisions:
> Liability to pay tax on supply of online money gaming by a supplier located outside India to a person in India,
> Single registration for such supplier through simplified registration scheme, and
> Blocking of public access to information in any computer resource used for supply by such person in case of failure to comply with the above requirements.
(viii) Section 10 of the IGST Act is amended to provide that where the supply of goods is made to a person other than a registered person, the place of supply shall be:
> location as per the address of the said person recorded in the invoice issued
> location of the supplier, where the address of the said person is not recorded in the invoice
♦ In light of the above amendments, online money gaming whether involving game of chance or game of skill will be subject to GST. The value of supply will be considered as the amount paid or payable to or deposited with the supplier, by or on behalf of the player (excluding the amount entered into games/ bets out of winnings of previous games/ bets) and not on the total value of each bet placed.
♦ It is also mentioned by officials at few occasions that the above amendments are clarificatory in nature. Consequently, these amendments may have a retrospective effect if the same are in nature of mere clarification. However, the grounds to support the view that these amendments are clarificatory in nature are very remote since these are substantial amendments in the CGST/IGST Act which will have severe ramifications.
♦ Taking a clue from the statement that these amendments are clarificatory in nature, this have lead to increase in issuance of notices and investigation proceedings by department.
♦ The question whether treating all online money games including games of skill at par with casino, betting, lottery, gambling and horse racing will stand the test of time needs to be seen. It is pertinent to note that skilled based games in certain States have been treated as legal. Betting and gambling being a State subject matter under the Constitution of India and therefore each State has the exclusive legislative competence to enact laws relating to betting and gambling within its State. While Public Gambling Act, 1867 (PGA) has been adopted by certain States in India, the other States have enacted their own legislation to regulate betting and gambling activities within the State.
♦ For instance the Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skill Act, 2016 (“Nagaland Act”) expressly recognises virtual team selection games and virtual sport fantasy league games as games of skill. If such games are sought to be offered online in the State of Nagaland, a licence would be required. Similarly the State of Meghalaya have recognised virtual sports fantasy games by following a licensing regime.
♦ Rajasthan has recently issued a draft bill, namely the Rajasthan Virtual Online Sports (Regulation) Bill 2022, proposing to regulate fantasy sports in the State under a licensing regime.
♦ Further, the Gaming Enactments/Courts in certain Indian states have specifically recognised poker as a game of skill such as:
(i) the State of West Bengal has specifically excluded poker from the definition of “gambling” under the West Bengal Gambling and Prize Competitions Act, 1957;
(ii) the Nagaland Act has specifically categorised poker as a game of skill; and
(iii) the Karnataka High Court has also held that a licence is not required under the Karnataka Police Act, 1963 (“Karnataka Act”) when Poker is played as a game of skill
♦ The High Courts of Punjab & Haryana (Varun Gumber v Union Territory of Chandigarh and Ors), Bombay (Gurdeep Singh Sachar v Union of India & Ors) and Rajasthan (Chandresh Sankhla v State of Rajasthan and Ors.), have upheld the status of the fantasy sports format offered by leading operator Dream11 as a game of skill and consequently exempted it from the prohibitions under the Gaming Laws and also protected it under the Constitution as a legitimate business activity. However, Supreme Court has stayed the operation of Bombay High Court judgment delivered in the case of Gurdeep Singh Sachar v Union of India & Ors.
♦ While the amendments in the law pertaining to online gaming sector has bought some clarity i.e. by defining online money gaming, the effective date of implementation of the same needs to be observed. For the period prior to amendment, the decision of SC in case of Gameskraft will play a crucial role in defining the parameters for ‘game of chance’ and ‘game of skill’ including a combination thereof. Further, the time limit to issue SCN under section 73 of CGST Act for the period July 2017 to March 2018 is getting over soon i.e. 30 September 2023, the companies will have to watch out for the subsequent period.
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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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