Online gaming in India has gained massive popularity amongst the younger population of the country and also impacted the nation’s economy profoundly in a short span. India has the largest adolescent and youth population in the world below the age of 35 roughly around 808 million, the country is now the fifth largest online market in the world. It is reported that our country has more than 20 crore online gamers and the industry attracts an FDI of more than 20,000 crores. However, the recent GST regime has been in turbulence causing apprehensions in India’s online gaming Industry. More so, after the Group of Ministers (“GOM”) have primarily sought to increase the levy of GST from 18% to 28%. In this context, it becomes necessary to understand the application of GST laws on online gaming companies.
The GST council meeting held its 47th meeting at Chandigarh on 29.06.2022 wherein the GOM led by Meghalaya Chief Minister, Sri. Conard Sagma was directed to re-examine the issue of levying GST on Casinos, Race Courses, and Online Gaming in terms of reference based on further inputs from States and to submit a report within a short duration. Accordingly, the GOM, initially, decided to recommend a levy of 28% of GST on Gross Gaming Revenue for Online games. However, after opposition from various members and stakeholders, it decided to refer the matter to the legal committee to seek a legal opinion in light of differentiating the game of skill and the game of chance.
However, before the GOM made its final recommendations on the said issue, the Directorate General of GST Intelligence (DGGI) issued a show cause notice dated: 08.09.2022 to Gameskraft, an Online gaming platform. alleging GST evasion from 2021 to June 2022 and levying GST at 28% amounting to Rs. 21,000 crores (plus interest and penalty). Gamekraft is a Bangalore-based Online gaming company that provides a platform for Online gaming, especially for rummy. The said show cause notice dt:08.09.2022 was challenged before the Hon’ble High Court for the State of Karnataka in W.P. 18304/2022. The Hon’ble High Court stayed the operation of the show cause notice dated: 08.09.2022 until further orders vide order dated: 23.09.2022.
Entry 34 in List II of the seventh schedule of the Indian Constitution deals with Betting and Gambling. Ergo, the respective State Governments have the power to make laws about regulation/ban of Betting and Gambling. Accordingly, many state governments have held Betting and Gambling to be illegal, while some state governments framed enactments to regulate such activities. The Hon’ble Supreme Court of India for the first time applied the test of determining if a game is played by skill or only chance in R. M. D. Chamarbaugwalla vs The Union Of India. When a game encompasses both skill and chance, it has to be tested to determine which factor overweights the other. If skill overweights chance, then the game cannot be classified as Betting. In such cases, Article 19(1)(g) becomes applicable and restricting such games shall be restricted only in terms of Article 19(6).
The Hon’ble Supreme Court of India in State of Andhra Pradesh v. K. Satyanarayana and Ors held that the Rummy is a game of skill and not chance alone. The court opined that the game of Rummy requires a certain amount of skill because the fall of the cards has to be memorised and the building up of Rummy requires considerable skill in holding and discarding. Therefore, the game is mainly and predominantly a game of skill. In K.R. Lakshmanan v. State of Tamil Nadu and Ors, the Hon’ble Supreme Court held that Horse Racing is a game of skill as success depends principally on superior knowledge, training, attention, experience, and adroitness of the player. In the recent past, the High Courts of various states had to examine whether online games and fantasy fall within the purview of Betting and Gambling. The legality of Dream 11 fantasy was questioned before the Punjab and Haryana High Court and the Bombay High Court. Both the High Courts have held that playing fantasy games would certainly require considerable skill, judgement, and discussion. In fantasy leagues, the participant has to assess the relative worth of each athlete/sportsman as against all athletes/Sports Persons available for selection. He is required to study the rules and regulations regarding the strength of athletes or players and their weaknesses also. Choosing 11 players out of the pool of players certainly requires knowledge and judgement and the element of skill and predominant influences the outcome on dream 11 fantasy.
In the year 2021, the State Government of Tamil Nadu and the State of Karnataka have respectively made amendments to their Police Laws to ban/regulate/ prohibit all forms of games being conducted in cyberspace. On the ground that, inter alia, both the respective amendments failed to differentiate the games of skill and game of chance, the said amendments were struck down by Madras High Court and Karnataka High Court respectively. The Kerala High Court held that Online Rummy is a game of skill and prohibiting the same would amount to violation of Article 14,19(1)(g) of the Constitution of India and contrary to the law laid down by the Supreme Court of India.
Section 7 of the CGST Act defines the scope of supply. Supply includes all forms of supply made or agreed to be made for consideration. Schedule III of the CGST Act lays down the list of activities or transactions which shall not be treated as either supply of goods or services. Sl. No.6 of Schedule III mentions actionable claims other than Lottery, Betting, and Gambling. Accordingly, Online Gaming, which is a platform for the participants to play a game or enter into a fantasy league for a rake fee as consideration, squarely falls within the meaning of supply of service. The present GST regime also includes Betting and gambling as a supply of services.
Further, Section 15 of the CGST Act provides for the valuation of supply. It states that the valuation of supply shall be the transaction value for which the price is paid or actually payable. Rule 31A(3) of the CGST Rules, 2017 states that the value of supply of actionable claims in the form of a chance to win in a Lottery, Betting, Gambling, or Horse racing shall be 100% of the face value of the bet or amount paid into the totalizer. Since the heading of Rule 31A explicitly uses the words “Lottery, Betting, Gambling, Horse racing”, Online Gaming is outside the scope of the said rule. Under Explanatory Notes to the Scheme of Classification of Services of Lottery, Betting, Gambling, and Horse racing fall under the heading 999692 levying GST @ 28%, and Services of Online Gaming fall under heading 998439 levying GST @ 18%.
Albeit the GOM assured to re-examine the rate and valuation method of levying GST for Online Companies, the actions of DGGI in issuing show cause notices to one of the leading Online gaming companies, levying GST at 28% has triggered turbulence in the industry. More so, when the DGGI further states that many other show cause notices are in pipeline and will be issued to other companies in the due course. Ergo, the Online Gaming Companies are apprehensive of 2 aspects: 1. Rate of GST that will be made applicable to them 2. Valuation method that will be used for computation of tax.
As discussed above, 18% of GST is currently applicable to this industry but the show cause notice issued by DGGI levying GST at 28% causes a conundrum. This increase in levying GST at 28% is problematic at multiple levels. Firstly, it goes against the legal jurisprudence laid down by the Hon’ble Supreme Court and other High Courts distinguishing the Game of Skill and the Game of Chance. Categorising Online gaming platforms that require considerable skill with Lottery and Betting by imposing 28% tax will amount to contravene the settled legal position of law. Even assuming that Online gaming is not clubbed with activities such as Betting but is individually assessed to be taxed at 28%, that would still evince that the government is treating Betting and Online gaming on the same pedestal, violating Article 14 of the Constitution treating unequals alike. Further, placing Online gaming platforms to be taxed at 28% indicates that the government and the policymakers are considering Online gaming as a sin service. Sin good/service is a policy decision to impose a greater tax on a particular good or service to ensure that the said good or service is less likely to be consumed. In a situation when this industry contributes much to the economy and has catered to more than 250+ start up’s creating employment for thousands of technical professionals, treating Online gaming as sinful may be incorrect.
The second apprehension is the valuation method to compute the tax. While Section 15 of the CGST Act states that the valuation of tax shall be on the transaction value, Rule 31A(3) of CGST Rules stipulate that in case of activities of Lottery, Betting, Gambling, Horse racing, valuation of tax shall be 100% of the face value of the bet. Currently, the valuation method adopted to compute GST in respect of the Online Gaming Industry is on the transaction value i.e for the services they provide as a platform for consideration i.e. rake fee. But the news suggests that the GOM is considering adopting the valuation of Rule 31A(3) for Online Gaming platforms as well. Although hardship caused to pay tax is not a ground to challenge the same, such a method of valuation would certainly affect the business profoundly. The model of Online gaming is based on a rake fee that the platform charges to facilitate the players to play the game and pool their money. The pooled money collected by the platform is put in an escrow account, in compliance with guidelines imposed by RBI, to distribute it amongst the winner or group of winners. Therefore the pooled money held by the platform from the time it collects from the participants and disburses to the winner(s) is only in a fiduciary relationship. Hence, the pooled money becomes an actionable claim, keeping it outside the purview of tax in terms schedules III of CGST Act. The services rendered by the platform are only limited to facilitation for which a rake fee is charged not having any monetary gain from the pooled money. Therefore, imposing a tax on pooled money will cause severe hardship and deter the companies not to continue the said business. Further, such an act would be in disregard of the basic taxation principle i.e to tax based on the nature of services rendered by the assessee.
The Online Gaming Industry will be hopeful that the GOM will continue to tax them at18% on the transaction value. But at the same time, the revenue will also be justified in their actions to issue show cause notices in respect of Online games that are solely based on chance. Therefore, to put an end to this tussle, the policymakers should provide clear guidelines to identify such Online games that are solely based on chance and not skill, rather than leave it to the Courts to examine the nature of gaming in each case to reduce multiplicity of litigation.