01.09.2023: Online Gaming: Implications of GST amendment and retrospective application

There has been a lot of discussion surrounding the recent changes to the CGST Act, which will only come into effect once all State GST laws have also been amended. One area of particular concern is the potential retrospective application of these changes to online gaming in India.

For the first time, the words “Online Gaming” and “Online Money Gaming” have been introduced in the GST paradigm. The definition of “supplier” under GST law has also been extensively amended. 

The amendment in the definition of ‘supplier’ has mammoth ramifications since GST is a tax on ‘supply’ of goods and services, and now the fundamental definition of supply itself stands amended. 

The principle issue of concern, in the implication of these amendments, remains the fact that although the amendments have brought paramount, crucial and substantial changes into the paradigm of GST law, they are said to be ‘merely clarificatory’ in nature, thus paving the way for its retrospective application, since an amendment which is clarificatory or explanatory in nature (contrary to a substantive amendment), could only be retrospective in operation.

Before delving into the further implications and questions of legal tenability of these amendments, it would be fruitful to study the backdrop and context of the amendments.

Legally speaking, every citizen of India has the constitutionally protected right to earn by leveraging one’s skill subject to ‘reasonable restrictions’ by the state, which should not be disproportionate. 

To establish a reasonable boundary or Lakshmanrekha between ‘games of skill’ and ‘games of chance’, the Supreme Court brought in differentiation between ‘games of skill' and ‘games of chance' in 1957.

While ‘games of chance’ (interpreted to mean ‘betting and gambling’) fell outside the Lakshmanrekha and thus could be prohibited by the state or allowed, based on license conditions as has been done in states like Goa and Sikkim, ‘games of skill’ were protected by the fundamental right of trade/profession under the Constitution. Owing to this constitutional protection, multiple online gaming platforms that facilitate established games of skill (like some card games) have developed in India in the last few years.

Notably, the revenue earned by such online gaming platforms is in the form of ‘platform fees’ which they earn for the services of facilitating games of skill on their platform, on which GST was to be paid at 18% by these platforms. Illustratively, Say, ‘X’ and ‘Y’ put in ₹1000 each for an online game; where the winning player will get ₹1800 and the online gaming platform collects ‘Platform Fees’ of ₹100 each from ‘X’ and ‘Y’. It is this INR 200 (100 + 100) on which GST at 18% is liable to be deposited by the online platforms. However, under the new amendment, if the GST authorities now retrospectively attempt to collect GST at 28% on entire ₹2000 i.e., ₹560, it would create a situation of a financial fiasco where platforms will be asked to pay ₹560 in tax when their total revenue itself was only ₹200.

For “betting and gambling” (i.e., games of chance), prior to these amendments, GST laws prescribed a 28% GST rate with a special valuation provision to levy this 28% GST on the entire face value of all bets placed. It is this provision that was being sought to be invoked against online gaming platforms facilitating ‘games of skill’ also for the past period, since GST authorities claim that online gaming companies are not providing facilitation services to the players/users but supplying ‘actionable claims in the nature of chance to win in betting and gambling’.

In a recent case before the Karnataka High Court, where the GST authorities had issued a notice in 2022 to an online gaming company demanding ₹21,000 crores (which included the demand retrospectively) with regard to payment of 28% GST on the entire face value of the monetary stakes placed thereon, the High Court, in May this year, quashed the notice after reviewing the legal position at length and has clarified that “games of skill” (like Rummy), even if played with money stakes, cannot be taxed in the same manner as gambling. The High Court effectively reiterated what the Supreme Court and other High Courts have repeatedly said.

Juxtaposing the recent amendments to the CGST Act with this judgement of the Karnataka High Court, it transpires that the amendments are starkly in the teeth of the established jurisprudence in this domain and could be viewed as an alternative route to again attempt to tax online gaming in an analogous manner as ‘betting and gambling’, thereby blurring the judicially drawn lines between ‘games of skill’ and ‘games of chance’.

Coming back to the claim of GST authorities regarding ‘actionable claims in the nature of chance to win in betting and gambling’, it is noteworthy that online gaming companies have always argued that, factually, they don’t supply ‘actionable claims in the nature of chance to win’; instead, it is the players who supply such ‘actionable claims’ to each other – online gaming companies merely facilitate the gameplays between players.

In light of the recent amendment, it can be said that to overcome the fundamental factual rebuttal by the gaming companies, the definition of “supplier” has been amended by introducing a ‘deeming fiction’ in the said definition as per which online gaming companies will be deemed to be the “supplier” of ‘actionable claims’ (in the nature of chance to win). 

Thus, the very concept of “supplier” as envisaged under the GST laws is being enhanced significantly, in order to widen the taxable base to levy GST on online gaming companies as ‘suppliers’ of ‘actionable claim’. Consequently, the new amendments 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’, which is a drastic deviation from 60 years of developed jurisprudence and renders the tenability of such amendments questionable.

However, what is more puzzling is that while there is no whisper of retrospective applicability in the language of these new GST amendment statute, it is still being stated to be ‘merely clarificatory’ and thus applicable even for the past period. This attempt of retrospectively applying the new amendments is not tenable in law since the Supreme Court has repeatedly clarified the scenarios where amendments can be said to be ‘merely clarificatory’ – substantive amendments like these recent GST amendments, do not, by any stretch of imagination, qualify as clarificatory.

From a pragmatic perspective, the retrospective application of these new amendments appears to be counterproductive. Such an approach would hurt investor sentiments vis-a-vis India, in a similar fashion as the infamous retrospective amendment that was brought in to overturn the Vodafone judgement of the Supreme Court.

Thus, retrospective application of the new amendment does not seem to have strong legs to stand on and if such ‘clarification’ is used to effectively alter the scope of the original levy itself, it will have to be interpreted as a ‘substantive’ amendment. Thus, in the present case, where the amendments appear to be substantive in nature, it would not be legally tenable to apply them retrospectively.

Source: LiveMint

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