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World class digital infrastructure, ubiquitous smartphones, affordable internet, young population teeming in millions, compulsory homestay due to lockdown, cricket mania, a vicarious urge for the game, an ecosystem of creators, what else was required for the growth of a budding online industry – we are talking about the fantasy sports, the online gaming industry, the youngest industry (if law permits us to use the terms “sports” and “gaming” for the purpose). As per https://www.investindia.gov.in/sector/media/gaming, India is the world’s largest mobile gaming market in terms of app downloads; India has the largest fantasy sports market, with a user base of 130mn; revenue from online gaming grew 28% in 2021 to $1.2 bn and is expected to reach $1.9 bn by 2024; India has already produced 3 gaming unicorns: Game 24X7, Dream11, and Mobile Premier League. Online gaming is one of the fastest growing job creators, generating high-value employment for thousands across India, and has elevated Indian gaming companies in investor league tables globally.[1]

The Indian journey has just begun; so it seems, if we notice the world online gaming industry India is nowhere near. As per conservative estimates global online gaming industry is to reach USD 132 Billion by 2030[2]. Be it Satya Nadela (Microsoft) or Sundar Pichai (Google), “CEOs coming onstage to talk about games is a strong endorsement of the opportunity at hand”[3]. Online gaming is projected as the next big thing in the digital industry.

In this article, we examine the online gaming industry from the perspective of GST law. But first and foremost question that strikes the mind is whether online gaming industry is legal in India.

IS ONLINE GAMING LEGAL IN INDIA

The issue was judicially examined in recent years in the three petitions involving Dream-11 Fantasy Pvt. Ltd.:  Varun Gumber v. Union Territory of Chandigarh and Others [in CWP No. 7559 of 2017 vide decision dated 18.04.2017 of Punjab and Haryana High Court], Gurdeep Singh Sachar v. Union of India [2019 (30) G.S.T.L. 441 (Bom.)] (a criminal PIL in Bombay High Court), and Ravindra Singh Chaudhary v. Union of India [2020 (42) G.S.T.L. 195 (Raj.)]

In Varun Gumber matter, the issue was examined by the Hon’ble Punjab & Haryana High Court from the perspective of Public Gambling Act, 1867. Section 12 of the said Act reads as:

“Act not to apply to certain games – Nothing in the foregoing provisions of this Act contained shall be held to apply to any game of mere skill wherever played”.

After examining the factual position and detailed submissions of the Dream-11, the Hon’ble Court found that, “playing of fantasy game by any participant user involves [drafting of] virtual team by him which would certainly require a considerable skill, judgment and discretion. The participant has to assess the relative worth of each athlete/sportsperson as against all athlete/sportspersons available for selection.” It was the element of skill that had predominant influence on the fantasy game than any other incident. As such, it was found that the Dream-11 was not covered under the Public Gambling Act and its activities had the protection granted by the Article 19 (1) (g) of the Constitution of India.  An SLP against this judgment of Punjab and Haryana High Court was dismissed by the Hon’ble Supreme Court vide Order dated 15-9-2017.

In the aforesaid the Hon’ble High Court also relied upon the judgment of the Hon’ble Supreme Court in K.R.Lakshmanan vs. State of Tamil Nadu [AIR 1996 SC 1153]. This judgment of the Hon’ble Apex court examines the expression “games of skill”, in considerable detail. The Apex Court judgment is on the game of horse racing.  The Apex Court, after examining the Indian precedents and international practices, held that the expression “mere skill” would mean substantial degree or preponderance of skill; that despite there being an element of chance, if a game is preponderantly a game of skill it would nevertheless be a game of “mere skill”.

Following the above legal position, the Hon’ble Bombay High Court in Gurdeep Singh Sachar, and Hon’ble Rajsthan High Court in Ravindra Singh Chaudhary held that the fantasy sports games provided by Dream-11 were predominantly games of skill and not games of chance and therefore within the framework of law[4]. The Hon’ble Supreme Court in interim order dated 06.03.2020 [SLP (Crl.) Diary No. 42282 of 2019] has stayed the operation of order and judgment passed by the Bombay High Court.

LEVIABILITY OF GST ON ONLINE GAMES

TAXABLE EVENT UNDER GST

Section 9 of the CGST, 2017 is the charging section for the purpose of GST[5]. Section 9 (1) enjoins that there shall be levied a tax called Central Goods and Services Tax on all intra state supplies of goods or services or both. Section 7 ibid. defines the “scope of supply”. As per clause (a) of the Section 7 (1), supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Supply under GST has a very expansive meaning includes all forms of supply of goods/ services. The services provided by the online gaming platforms are clearly covered under the definition of supply. Hon’ble Bombay High Court in Gurdeep Singh Sachar held that the services provided by Dream-11 are covered under heading 998439 as “Other online contents nowhere else classified”. As per the Explanatory Notes to Scheme of Classification of Services under GST, this service code includes, “games that are intended to be played on the Internet such as role-playing games, strategy games, action games, children’s games…” It would be appropriate to note that there is a separate heading 999692 that covers gambling and betting services including similar online services[6].

VALUE OF TAXABLE SUPPLY IN CASE OF ONLINE GAMING

Another opportune question is what is the value of taxable supply in case of online gaming. The online game platforms often collect two types of amount: one is the platform fee or the administration fee/ entry fee/ registration fee say @ 10 to 20% of the total amount, second is the remaining pot money which is usually kept separately, to be distributed as prize money to the winners. As per rule 31A (3) of the CGST Rule, 2017

“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”

This brings into focus Section 7 (2) (a) of the CGST Act, 2017 as per which activities or transactions specified in Schedule III of the Act shall not be treated neither as a supply of goods nor a supply of services. As per Entry No. 6 of the Schedule III, the “actionable claims, other than lottery, betting, and gambling” are neither goods nor services for the purposes of levying GST.

WHAT IS AN ACTIONABLE CLAIM

A claim in legal parlance usually means the aggregate of operative facts giving rise to a right enforceable by a court. Claims are of various types, for example, liquidated claims, matured claims, priority claims, secured claims etc. An “actionable claim”, as per section 2 (1) of the CGST Act, 2017  shall have the same meaning as assigned to it under in Section 3 of the Transfer of Property Act, 1882. As per the said Section 3, “actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to the beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts, recognise as affording grounds to the relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.  In its primary sense an actionable claim is a liquidated money obligation.[7]  The core of the definition of an actionable claim is that the claimant should be able to knock at the door of the court and the court should recognize the claim for granting relief to him.[8] There is a copious case law about whether a claim is an actionable claim or not.

Hon’ble Bombay High Court in the matter of the Gurdeep Singh Sachar observed that the amount pooled in the escrow account is an ‘actionable claim’, as the same is to be distributed amongst the winning participating members as per the outcome of a game, and the said actionable claim would fall under Entry 6 of the Schedule III under Section 7(2) of CGST Act. Hon’ble High Court held that 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 exempted from levy of any GST, and as such rule 31A (3) is not applicable to the facts of the matter.[9]

However, Hon’ble Rajasthan High Court in the matter of Ravindra Singh Chaudhary observed that the issue regarding GST is pending in the review petition before Bombay High Court. Hon’ble Rajasthan High Court in the similar petition has left the issue of classification and valuation of the online games to be decided by the GST authorities in accordance with the law.

Currently, GST Council is also seized of the matter regarding rate of tax on online gaming and the value for the purpose of taxation. A GoM led by Meghalaya chief minister Conrad Sangma is examining the issue. All eyes, on the issue, are set on the 48th GST Council meeting to be held sometime next month.

(Disclaimer: This is a general article and not an advice of any sort)

[1] https://www.thehindubusinessline.com/opinion/online-gaming-looking-beyond-self-regulation/article65827308.ece

[2] https://www.globenewswire.com/news-release/2022/07/06/2475487/0/en/Online-Gaming-Market-Size-to-Achieve-USD-132-Billion-by-2030-Growing-at-10-2-CAGR-Fueled-by-Massive-Investments-in-the-Gaming-Industry-Exclusive-Report-by-Acumen-Research-and-Consu.html

[3] https://venturebeat.com/games/microsoft-ceo-satya-nadella-why-microsoft-is-all-in-on-gaming/

[4] It is pertinent to mention that Betting and gambling are listed under Entry 34 of the State List (i.e., List II of the Seventh Schedule), and are a state subject. Public Gambling Act, 1867 is an old central enactment and states have modified it and have enacted their own laws. This adds to the complexity of the law on the issue.

[5] This article refers to CGST Act. There are corresponding provisions in IGST Act and State and UT Acts.

[6] Services under SAC 998439 are chargeable @18%, and gambling services (999692) @ 28%.

[7] Moti Lal v. Radhey Lal. (1935), 55 All.814.

[8] Gurbachan Singh v. Rajinder, AIR 1976 P&H 336.

[9] As already mentioned above, this order has been stayed by the Apex Court.

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