Since the pandemic, the online gaming industry has witnessed exponential growth. As the revenue of the industry grew, it came under intense scrutiny by the Tax department. Before 01.10.2023, the online gaming industry was paying 18% Goods and Services Tax ('GST') on the Platform fee charged by them and not on the winning money or deposit amount. W.e.f. 01.10.2023, the GST rate has been increased to 28% and on the full value of consideration for online gaming irrespective of whether the gaming activity is a game of skill or a game of chance.
'Game of chance' v. 'Game of skill'
The Tax department issued notices to various online gaming platforms proposing to levy 28% GST instead of 18% on the ground that these are not 'game of skill' but 'game of chance' and equivalent to betting or gambling. One such notice came to be challenged before the Rajasthan High Court1. Further, a writ petition seeking to initiate criminal proceedings2 against the Platforms and a Public Interest Litigation3 was filed on this issue before some High Courts. All the High Courts gave similar observations, that the said games are 'game of skill' and would not be covered as game of chance or gambling. These judgments were primarily based on the decisions of the Hon'ble Supreme Court in the case of K.R. Lakshmanan (Dr.) v. State of T.N., 4which relied upon R.M.D. Chamarbaugwala & Anr. v. Union of India & Anr.5,.
The Gameskraft decision
In September 2022, M/s Gameskraft Technologies Pvt Ltd was issued a GST notice of ₹21,000 crores. This notice was challenged before the Karnataka High Court6, Gameskraft directly approached the High Court on the premise that games such as Rummy which are predominantly based on skill, whether played with or without stakes cannot be brought within 'gambling or betting' under Entry 6 of Schedule III of the Central Goods and Services Tax Act, 2017 ("CGST Act")7.
The Karnataka High Court allowed the writ petition of Gameskraft and quashed the GST notice, the key observations of the High Court are as under:
- that there is a clear difference between games of skill and games of chance, which is of constitutional significance as the former is protected under Article 19(1)(g) as legitimate businesses whereas the latter is treated to be res extra commercium.
- that "though Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, however, that in itself would not mean that lottery, betting, and gambling are the same as games of skill. The meaning of the terms "lottery, betting, and gambling" as contemplated in Entry 6 of Schedule III of the CGST Act should be construed nomen juris in the light of the decisions of the Supreme Court, and various High Courts, which have taken a contrary position. Entry 6 in Schedule III to the CGST Act taking actionable claims out of the purview of supply of goods or services would clearly apply to games of skill.
- that games of chance, such as lottery, betting, and gambling would be taxable. Taxation of games of skill is outside the scope of the term 'supply' in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act." Further, the Court clarified that a game of chance if played with stakes is gambling, however, a game of skill whether played with stakes or without stakes is not gambling.
- "The expressions, 'betting' and 'gambling' having become nomen juris, the same are applicable to give meaning to terms under GST. Consequently, the terms, 'betting' and 'gambling' contained in Entry 6 of Schedule III to the CGST Act are not applicable to online/electronic/digital rummy, whether played with stakes or without stakes as well as to any other online/ electronic/digital games, which are also substantially and preponderantly games of skill." The terms 'betting' and 'gambling' appearing in Entry 6 of Schedule III of the CGST Act do not and cannot include games of skill within its ambit.
However, this Judgment has been stayed and the issue is now pending consideration before the Hon'ble Supreme Court8..
GST Council's recommendations
While the Industry was contesting the notices before the Courts, a Group of Ministers (GoM) was proposed to be constituted to look into issues relating to the taxation of horse racing, casinos, and online gaming in the 42nd Meeting of the Goods and Services Tax (GST) Council.
In the 45th Meeting of the GST Council held on 17 September 2021, the GoM was mandated to examine all issues including rates and valuation of online gaming, horse racing, and casinos.
The GoM submitted its first report ahead of the 47th GST Council Meeting that was held on 28-29 June 2022. This report recommended 28% GST on the full value of consideration for online gaming irrespective of the gaming activity being a game of chance or game of skill. The full value of the consideration would be taken for calculating the levy of 28%. In the case of casinos, the report recommended 28% GST on the purchase value of chips. However, the GST Council decided that the GoM may relook into all the issues once again.
The GoM submitted its second report before the 50th GST Council Meeting that was held on the 11th July 2023. The GoM, in this report, had stated that no consensus could be reached on whether the activities of online gaming, horse racing, and casinos should be taxed at 28% on the full-face value of bets placed or on the Gross Gaming Revenue (GGR), accordingly, the GoM asked the GST Council to take appropriate decision at their end.
Consequently, the GST Council recommended a levy of 28% GST uniformly on the total game value for online gaming, horse racing, and casinos, irrespective of whether they are games of chance or games of skill.
Thereafter, GST Council regrouped on 02nd August 2023 for the 51st GST Council meeting and recommended certain amendments in the CGST Act 2017 and the IGST Act 2017 to provide clarity on taxation of the online gaming industry, casino, and horse racing.
Amendments in GST
Key amendments are as follows:
- Online gaming and online money gaming were
distinguished and defined separately:
- '(80A) "online gaming" means offering a game on the internet or an electronic network and includes online money gaming;
- (80B) "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;'
Thus, online gaming and online money gaming have been specifically defined under the CGST Act. Prior to this there was no such definition under the CGST Act.
- Introduction / Amendment of various definitions in the Act
- Amendment to Schedule III of the CGST Act, 2017 to exclude "Specified actionable claims" from the definition of actionable claims to provide clarity regarding the taxability of actionable claims involved in or by way of casinos, horse racing, and online gaming.
- "specified actionable claim" is defined to mean 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;
- '(117A) "virtual digital asset" shall have the same meaning as assigned to it in clause (47A) of section 2 of the Income-tax Act, 19619'.
These amendments have been made to clear the embargo for taxing online money gaming. A new category of actionable claims has been introduced, i.e., 'specified actionable claims' and online money gaming has been included in this category.
- "Online money gaming" has been excluded from the
definition of 'Online Information and Data Access or Retrieval
(OIDAR)' services prescribed under the IGST Act 2017. This
distinction ensures that online money gaming activities, where
participants deposit funds with the anticipation of winning money
or equivalent assets, are treated separately from digital service
offerings covered under OIDAR.
- Amendment to the definition of "Supplier" in clause
(105), by inserting the following proviso:
"Provided that a person who organizes or arranges, directly or indirectly, 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, whether such actionable claims are supplied by him or through him and whether consideration in money or money's worth, including virtual digital assets, for the supply of such actionable claims is paid or conveyed to him or through him or placed at his disposal in any manner, and all the provisions of this Act shall apply to such supplier of specified actionable claims as if he is the supplier liable to pay the tax about the supply of such actionable claims";
Thus, the scope of supplier has been expanded to include a person who supplies specified actionable claims and a person who owns, operates or manages platforms for such supplies.
- New Rule 31B was introduced to help determine the value of
supply for online money gaming consideration. As per this rule, the
value of supply would be the amount deposited or paid/payable with
the supplier in the form of money or money's worth including a
virtual digital asset by or on behalf of the player. Further, the
amount returned or refunded shall not be deducted/ nor reversed
from the total face value amount of online money gaming.
- Amendment in Section 24 of the CGST Act, 2017 is proposed to
mandate the obligation to get registered in terms of the Indian GST
Laws for the persons providing online money gaming services from a
place outside India.
Generally, in the case of import, the recipient is liable to pay GST under the reverse charge mechanism, and the entity situated outside India is not required to take a GST registration. However, the Government for the 1st time has introduced registration on a foreign entity if it is supplying online money games to a person in India. - Further, Section 14A has been introduced in the IGST Act, 2017 to provide for special provisions for specified actionable claims supplied by a person located outside the taxable territory. Accordingly, it provides for special provision for online money gaming supplied by a person located outside the taxable territory to a person located in India, including the requirement of taking a single registration under the Simplified Registration Scheme, payment of Integrated Tax on such supplies and provision for blocking of supplier's online money gaming-related information in any computer resources for access by the public in India in case of non-compliance.
This shows that the Government does not want to leave any stone unturned and wants the entities to be as compliant as any other Indian entity.
From the above amendments, it is very much clear that the Government wanted to treat all online gaming platforms in the same manner as a betting house/casino, without making a distinction between 'games of skill' and 'games of chance' and tax all of them in the same rate, i.e., 20%. To overcome the rulings of the Court these amendments have been made to end the debate between a game being 'a game of skill' or 'a game of chance' and to overcome the decisions given by the Supreme Court and the High Courts in favour of assessees.
However, this does not close the issue indefinitely as the Gameskraft matter is still pending before the Hon'ble Supreme Court. Also there may be a situation where the amended provisions are challenged before the Courts.
Footnotes
1. Myteam11 Fantasy Sports Pvt. Ltd. v. Union of India, D.B. Civil Writ Petition No. 1100 of 2023, decided on 18-1-2023
2. Shri Varun Gumber v. U.T. of Chandigarh, CWP No. 7559 of 2017 decided on 18.04.2017
3. Gurdeep Singh Sachar v. Union of India, Criminal Public Interest Litigation Stamp No. 22 of 2019, decided on 30-4-2019
4. (1996) 2 SCC 226
5. AIR 1957 SC 628
6. Gameskraft Technologies (P) Ltd. v. Directorate General of Goods and Services Tax Intelligence 2023 SCC OnLine Kar 18
7. Actionable claims, other than lottery, betting and gambling.
8. Directorate General of Goods and Services Tax Intelligence v. Gameskraft Technologies (P) Ltd., SLP(C) No. 19366-19369/2023
9. (47A) "virtual digital asset" means—
(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called;
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify: P
rovided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.—For the purposes of this clause,—
(a) "non-fungible token" means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
(b) the expressions "currency", "foreign currency" and "Indian currency" shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999)
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