Gross gaming revenue or total stake amount: What will be the GST Council verdict?

GST

The GST Council has been considering raising the tax payable on online gaming to 28 percent.

However, the gaming industry has urged the government to retain the tax on online games at 18 percent, since tax to 28 percent on total compensation would result in a 55 percent rise in the tax incidence.

According to the industry, online skill-based games are run on a totally digital platform, offering the most transparent method of accounting for GST, with almost no scope for revenue leakage.

However, from various reports, it seems the Council is inclined to increase the rate of tax.  The key question that remains is whether the levy of tax will be on the Gross Gaming Revenue (GGR) or the total compensation.

Let us understand in greater detail the ongoing deliberations between the gaming industry and the government regarding the increase in the GST rate, GST leviable on the game of skill and the practical challenges the industry may face, if such an increase is made on the total compensation rather than on GGR.

We will also be analysing the practice adopted by various countries for taxing the gaming industry.

GST rates and valuation

GST is levied on services such as admission to entertainment events, access to casinos, sporting events, etc., at the rate of 28 percent on the transaction value.

GST is not imposed on actionable claims like online gaming activities, since they do not fall under the gambling or betting categories (i.e., skill-based games). A gaming platform, however, charges 18 percent GST on the revenue generated by platforms after the prize pool is deducted.

According to revenue authorities, online games are taxed differently because of the valuation mechanism prescribed under Rule 31A (3) of the CGST Rules and the ambiguity in various state laws related to betting and gambling.

As a result, rather than levying GST on the actual service fee earned by the platforms, authorities consider taxing the entire stake amount.

Also read: Online gaming industry for 28% GST on gross gaming revenue not on entry amount

GST trends around the globe

The current tax rates in the US for online gambling and other related transactions have state-level taxes, which are imposed on GGR, which is taxable at both the federal and state levels. In the US, in principle, gaming companies are taxed on the rake fees they earn.

In New Zealand, there is a totalisator duty of 4 percent on betting profits, a lottery duty of 5.5 percent on all tickets represented in any lottery drawing, a gaming machine duty of 20 percent on gaming machine profits and a casino duty of 4 percent on casino winnings, which are under the bracket of the gaming and entertainment taxes.

The casinos pay duty at 4 percent of their gross profits. New Zealand is at risk of losing gaming companies to Australia due to the 30 percent tax offset offered by the Australian government to relocate.

Horse racing, casinos, progressive jackpots, etc., are taxed more simply by South Africa. The net amount (stake value minus winnings) is subjected to VAT under its Value Added Tax Act, 1991.

Unlike other countries, the UK does not charge VAT on online gaming and it imposes a remote gambling duty of 21 percent on rake fees, instead. In the EU, VAT is imposed only on the rake fees earned by the gaming platforms.

Challenges in taxing the stake amount

Currently, the industry is paying GST for online-skill based games at 18 percent on GGR. The platform levies a fixed fee (recognised as GGR) and deducts tax from it. Under the Income-Tax laws, a 30 percent tax is deducted at source before paying income from winnings above Rs 10,000.

What is concerning is the tax would be assessed on the whole pool, rather than the GGR. In contrast to the government's backing for the skill-based gaming industry, a high GST rate on the entire amount will be unfavourable to that sector and inconsistent with worldwide best practices.

A tax increase in terms of rate as well as value will cause a significant drop in the amount of prize money available for distribution, which will drive players away from genuine applications/websites towards illegitimate ones. This will consequently result in a decline in the amount of revenue generated by tax-paying entities and will also lead to unaccounted transactions, resulting in large scale tax evasion and revenue leakage.

The gaming industry’s concern is that the sunrise industry would be razed if the increase in tax rate is implemented along with change in the valuation mechanism. The government's commitment to this emerging sector will be demonstrated by the earliest resolution of this controversy in conjunction with the industry. A rise in tax base on the total gaming deposit will be disastrous, but the industry might at most survive at a 28 percent rate.

Conclusion

In our view, a general characterisation of online gaming on par with betting and gambling will have serious consequences to the industry’s development. It is likely to adversely impact these early-stage companies if they are overtaxed with the proposed 28 percent rate on the entire amount, rather than just the platform fee.

The regulation of the industry through a tax policy is not an ideal mechanism and any concerns from this industry should be addressed by specific regulations around these concerns. Over-taxing online gaming companies and clubbing them with gambling may prove detrimental to Indian gaming companies and drive away a lucrative industry into the hands of countries like Australia, which are offering incentives to promote the establishment of gaming companies.

In our view, GGR should continue to be subject to GST in order to ensure that gaming companies are able to operate in India and to discourage underground markets in this area. The government benefits from creating a middle path to ensure the flow of revenue and have a control on the addiction to these online gaming portals.

Brijesh Kothary is an Associate Partner and Saundarya Sinha an Associate at Lakshmikumaran & Sridharan Attorney.