31.08.2023: GST on online games remains vexed issue despite Council blunting its impact

The Goods and Services Tax (GST) Council was expected to resolve the vexed issue of taxation on e-money gaming companies. After months of deliberations by the group of ministers (GoM), the Council impose 28 per cent GST on bets placed by participants on e-games, but provided relief to companies by restricting it to entry levels.

However, the industry is unhappy as they are averse to paying GST on bets. The industry is willing to pay GST on platform fees, which they say is their income from offering these services.

To understand the whole issue, let us take an example of an online money gaming company that has four players playing the game.

Let us assume each player placed bets worth Rs 100. As such, total bets would be Rs 400. Now, the company concerned gets a platform fee, at the rate of 10 per cent of the bet. This meant Rs 10 from each player and Rs 40 in total is what the company earns. Players winning the games can redeploy their prize into the game.

The industry wants to pay GST on Rs 40 only. However, the Council decided to impose 28 per cent GST on Rs 400 and exempted the prize money redeployed in the games from GST.

The government recently notified amendments in the Central GST (CGST) Act and Integrated GST (IGST) Act to provide clarity on taxation of online gaming as well as casinos and horse racing.

The amendment in the IGST Act relates to inserting a provision to impose GST liability on online money gaming provided by offshore entities. Such entities would be required to get GST registration in India.

The amendments will also provide for blocking access to online money gaming platforms located overseas in case of failure to comply with registration and tax payment provisions.

These amendments will come into force from October one this year after the state governments also amend their state GST Acts.

Earlier, companies such as Gameskraft Technology Private Ltd (GTPL) paid GST at 18 per cent to the tune of over Rs 800 crore on the platform fee only for 2017-18 to 2021-22. Other companies, including MyTeam11 and Probo, did the same. However, these companies received notices from GST authorities, which asked them to pay 28 per cent tax on the face value of bets. For GTPL, it amounted to Rs 21,000 crore for the said period. Other companies cited above, too, received GST notices, according to industry sources.

As cited above, the recent amendments excluded redeployment of bets won from the 28 per cent tax. If this logic were to be applied to Gameskraft, then the tax liability may reduce to Rs 5,000-6,000 crore, according to some experts. This, however, can happen only if the new law is retrospectively applied and fresh demand is raised on GTPL on that basis.

However, industry sources did not confirm the figure but said that even if the 28 per cent tax was imposed on entry-level bets, the tax liability on e-gaming companies would increase by over 400 per cent effectively compared to the 18 per cent companies paid on the platform fee.

“Rs 21,000 crore or Rs 5,000-6,000 crore is in thin air. The money that does not come to a platform should not be taxed to the platform. Only the revenue earned should be taxed,” an industry source said.

Earlier, notice to GTPL to demand GST to the tune of Rs 21,000 crore (plus interest and penalty) was set aside by the Karnataka High Court in May this year, ruling that games of skill, even if they involved money could not be taxed in the same manner as gambling.

The government filed a special leave petition in the Supreme Court against the order. Meanwhile, it enacted the law to impose 28 per cent GST on fresh bets in online money games, as cited above.

Rs 5,000-6,000 crore can be imposed on GTPL if the law is retrospectively applied, which industry feared would create a Vodafone-like situation for them.

Government sources, however, said there was nothing retrospective in the law because the amendments clarified matters.

GST is and has been applicable to online games at 28 per cent as they are actionable claims, the government sources said.

The high court has held that games of skill are actionable claims but do not involve betting and hence not liable to GST, the sources said.

“We are amending the law to clearly say that actionable claims in online money games are liable to GST,” a senior official said.

Industry sources said GST amendments to tax online money gaming companies at the rate of 28 per cent of entry level bets was an attempt to overcome the Karnataka High Court judgment. For the first time, the words “online gaming” and “online money gaming” were introduced in the GST law since the earlier attempt to tax online gaming as betting and gambling failed.

They said that even if the government charges 28 per cent tax on entry-level bets, it should be prospective and from October 1, 2023. However, if the GST authorities apply the law retrospectively since it did not exist from 2017-18 to 2021-22, it will kill the industry because no one will have the money to pay, another industry source said.

However, the industry opposes 28 per cent tax on fresh bets, too even prospectively.

Industry sources said this 400 per cent increase is neither fair nor sustainable.

They feared that apart from this resulting in the death of smaller players, in the long run, it will likely create monopolies and reduce choice for the playing public and users.

They also pointed out the deleterious effect on jobs and valuation.

Earlier, MPL had reportedly cut its workforce by 50 per cent in less than a month of the announcement of the GST Council's decision.

“In a nutshell, the law is an atom bomb, and retrospective application will be like a hydrogen bomb,” one of the industry sources said.

However, there is apprehension among those justifying 28 per cent GST on bets, saying the industry does not want to pay tax this way because it wants to hide the identities of the people playing these games.

When contacted, industry sources said the apprehension is completely misplaced.

“All online skill gaming companies, as of today, take money online only. No cash deposits are allowed at all. Therefore, the source is always trackable. Money is coming either from the users' bank account (net banking or UPI) or their credit or debit cards etc,” one of the sources said.

There is no difference between online gaming companies and any other online intermediary, such as Amazon, in this regard, the sources pointed out.

Even winnings go back to the bank accounts of the users, which are KYC-verified, they said.

Further, the Ministry of Electronics and Information Technology (MeitY) has prescribed KYC norms that online gaming firms will have to comply with, the sources pointed out.

“Industry has welcomed the MeitY guidelines and will conform to it in letter and spirit,” the industry source cited above said.

Among various things, these guidelines said online real money games offered by intermediaries would be regulated through MeitY-recognised self-regulatory bodies (SRB).

Sources said the industry hoped that MeitY would soon approve SRBs so all these regulations could come in.

Source: Business Standard 

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