The Indian online gaming sector represents one of the fastest growing sectors in the media and entertainment space. Favorable demographics, technology, smartphone penetration with immersive graphics, affordable data services have given a turbo boost to the sector. As the sector draws on massive growth potential, there are regulatory and fiscal challenges against the backdrop of moral, social and cultural narratives.
At present, the GST laws for games of chance that are in the nature of betting or gambling and games of skill differ widely in terms of both the rate of tax and the value on which tax is to be collected. The skill game is generally understood to be taxed at 18 percent GST on the platform fee, also known as Gross Gaming Revenue (GGR) or the rake fee. Gambling that is in the nature of betting or gambling is taxed at 28 per cent GST on the competition entry amount.
Skill vs. Chance
Since there is no definition of what is considered a game of skill or a game of chance, the question is now with the courts, which will decide the value of the game and the applicability of the tax rate. This provision is somehow dependent on the rules of the state and the characteristic of the respective game, that is, whether the predominant aspect of the game is use and the degree of skill and judgment involved in relation to a chance. There is no correlation and this provision differs from game to game.
To bring clarity and certainty, the GST Council has set up a Group of Ministers (GoM) committee to look into the tax issues of casinos, horse racing and even online gaming in consultation with the state governments.
The key points for consideration are: (a) determining parameters of classification for games of skill or chance, (b) tax rate and (c) valuation, i.e. value for collection of tax. A few months back, media reports suggested that the GoM has recommended levying 28 percent GST on all online gaming to bring it at par with betting and gambling and the value to be the competition entry amount and not the GGR or the platform fee for all types of online gaming.
But here it is imperative to understand that levying GST on the competition entry amount would mean levying tax on that component, in the case of real money games or online fantasy games, which is not the remuneration of the game operators but is a contribution to prize pool .
However, according to media reports, the GoM is currently considering the constitutional and legal differences between online gaming and betting, casinos and horse racing. The GoM is also considering taking a legal view to decide on the GST rate and valuation for each type of game.
One must consider that online games have a wide spectrum of games ranging from casual games, real money games and fantasy games. This issue is highly relevant in relation to online games treated as ‘games of skill’, as currently only GGR is taxed in consideration for online information database access and retrieval (OIDAR) service.
To add to the complexity, once the GST framework around cryptocurrencies is notified, one will also need to evaluate the GST position on online games where the transactions are done through cryptocurrencies.
There are fears that charging GST on entry fee or stakes would force the operators to pass on the higher GST burden to the players, which could directly affect the players’ winnings and the growth of the industry.
Against this background, the online gaming sector expects that an effective implementation of the proposed taxation scheme for the sector should take due account of all aspects of gaming’s nuances, growth potential, administrative ease, simplicity, international best practice and tax economics.
Gandhi is a Partner, Chaturvedi is a Director and Gada is a Senior Manager, Deloitte Haskins & Sells LLP. Views are personal