By Rameesh Kailasam
The GST Council and Ministry of Finance had constituted a Group of Ministers (GoM) to determine the GST rate and taxation on Casinos, Race Courses and Online Gaming which was subsequently reconstituted again and is scheduled to meet on 2nd May 2022 under Meghalaya Chief Minister Conrad Sangma.
There have also been well established decisions by various Courts like the Supreme Court, Rajasthan High Court, Punjab & Haryana High Court, Madras High Court, Kerala High Court, Karnataka High Court judgments in support of online games involving skill. Given this context industry bodies like Indiatech.org had sent multiple recommendations around tax treatment of online games of skill and explanations around the role and control of gaming platforms in handling the Contest Entry Amount (CEA) and the component on which GST should be made applicable. It is pertinent to note here that the Contest Entry Amount usually comprises of platform Fee or Gross Gaming Revenue (GGR) which is usually between 5% to 15% and Prize Pool which is in the region of 85% – 95%. In many games the average ticket size is between Rs. 25 to 35.
Prize Pool on the other hand is the amount that the platforms hold either by maintaining an escrow account or a clearly identifiable bank account or hold the monies received in a separate electronic ledger by third party service providers/Payment Gateways (PGs)/wallets etc. The winnings are then distributed to the users at the end of each game and this account becomes zero after the platform fee is taken back by the platforms.
In the Service tax regime, online gaming was levied on platform fee/ gross gaming revenue. Post GST it is taxed under HSN Code 998439 @18% on platform fee/ Gross Gaming Revenue (GGR) as “Other Online Content Not Elsewhere Classified” (NEC).
It is pertinent to note that the online gaming platform which is the technology platform has no right over the prize pool amount. Furthermore, Rule 31A of CGST Rules 2017 (‘Rule 31A’) deals with valuation of supply of actionable claim in cases of lottery, betting, gambling and horse racing, so as to fall within the rigours of Rule 31A which applies, to quote from the said Rule, only to activities involving “chance to win in betting, gambling or horse racing”.
Rule 31A(3) reads as “(3) 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.” Thus, it can be construed that Rule 31A strictly applies to games involving betting, gambling or horse racing etc. Since Rule 31A uses the word ‘chance’ before describing the activity it is clear that the Rule does not apply to online games based of skill.
“Actionable Claim other than lottery, betting and gambling” is covered under Entry 6 of Schedule III of CGST Act 2017. Prize pool money is an actionable claim and therefore exempt from levy of GST. Therefore only Gross Gaming Revenue or the Platform Fee alone should continue to be considered as the value of supply as per current practice. Additionally, if there are other formats/ revenue models followed by platforms such as entry fee, subscription fee, in game revenue etc., GST should be applicable on the amount received by the platform for rendering its services.
The GoM should ideally take a positive view and recommend continuance of current practice of considering platform fee/ GGR as value of supply. Since online skill based gaming is not gambling/betting/wagering, a clarification needs to issued to resolve litigation and provide relief to industry.
It is important to plug potential revenue leakages by stopping shifting of business to the grey markets and discourage non-compliance. International Learnings indicate that all leading markets tax on GGR at a rate between 7 to 20%. Countries that started taxing the prize pool instead of the GGR have now reverted back to taxing only GGR.
There is potential that needs to be rightfully tapped for India to see a number of startups grow out of this sector into the world. Therefore it is necessary that games involving predominance of skill should ideally be taxed at 18% on the platform fee. The Online Gaming industry in India has been burgeoning in the past few years with the emergence of over one thousand startups and has witnessed a considerable amount of positive economic impact.
(The author is CEO of Indiatech. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited)
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