The taxability of online gaming services under goods and services tax (GST) has always been tricky, hinged on the distinction of whether they are classified as 'gambling' or 'skill-based' activities. While gambling activities such as betting and casino games attracted a 28 percent GST rate, skill-based games were taxed at a lower 18 percent rate.
Since 2018-19, the industry has made several representations to the GST Council seeking clarity on the so-called 'value of supply' for online gaming. The metric refers to the monetary worth of goods or services provided by a supplier to a recipient for consideration. It is a crucial concept in determining the GST liability on transactions. The online gaming industry has been filing returns since 2017, and the GST Council was aware that the industry was paying GST at the rate of 18 percent, industry officials said.
Court judgments clearly distinguished online skill gaming from betting and gambling. Therefore, the industry couldn't have classified itself as betting or gambling for the purpose of taxation.
In early 2023, the Bombay High Court ruled in a case arising out a petition filed by Games24x7 that rummy was a game of skill. In November 2023, the Madras High Court noted that the law banning online games could apply to game of chance but not game of skills. The court asserted that rummy and poker, whether played online or offline, are games of skill.
In 2022, the Karnataka High Court accepted Gameskraft's arguments and set the GST department's tax notice aside, saying that rummy was a game of skill.
GST Council's decision
But the issue got complex with the GST department's decision that all games involving bets played between August 2017 and October 1 2023, irrespective of skill or chance, needed to pay 28 percent GST on face value, putting them under the same category as gambling. The Directorate General of Goods and Services Tax Intelligence (DGGI) subsequently issued retrospective notices to online gaming companies since September 2022 for what it describes as willful evasion of taxes.
As many as 71 online gaming companies, including Gameskraft and Delta Corp. have received tax notices to pay Rs 1.12 lakh crore (the total due), with some demands surpassing their annual turnover, according to the GST department's calculations (at 28 percent on the face value of bets). The industry has not collected the GST from the consumers to meet the Rs 1.12-lakh-crore demand, therefore there is no ability for the industry to pay the demands, industry officials said.
The companies contend that the matter has gone to court and is now being heard by the Supreme Court. The primary question before the apex court is constitutionality of the valuation methodology and classification of gaming as gambling irrespective of skill. The industry has raised concerns that the high demand notices will result in gaming companies having to file for bankruptcy.
History of amendments on GST on Online gaming
Under the service tax regime, the online gaming industry was paying tax under Online Information Database Access and Retrieval services (OIDAR), a category of services provided through the medium of internet and received by the recipient online without having any physical interface with the supplier of such services.
GST Council on online gaming
From October 1, 2023, the GST Council imposed a 28 percent tax on the full face value of online gaming, promising to review the levy after six months. The review will be done in the next Council meeting, which will be held after elections in June.
However, sources indicate that any revision in the calculation methodology or the tax rate on online gaming may be unlikely as the government is now getting over five times revenue after October 1, 2023.
Earlier GST from online gaming was at Rs 200 crore per month approximately, which has gone up substantially since October 1, 2023 to Rs 1,100 crore per month. In the October-December 2023 quarter, GST from online gaming touched Rs 3,470 crore, a more than five-fold jump from the Rs 605 crore collected in the previous quarter. The industry is expected to contribute over Rs 15,000 crore annually in GST and additionally Rs 4,000 crore through TDS in direct tax regime.
Demands of gaming companies
Online gaming companies, however, have been raising the issue that the current high tax rate is unsustainable for startups in the sector. As of now, these online gaming platforms are partially or fully absorbing the higher GST. The companies plan to approach the new government after the general elections to propose that the GST be computed on the gross Gaming Revenue (GGR) instead of the full face value.
GGR is the difference between the amount wagered minus the amount won. Full face value refers to the bet value or contest entry amount.
Win-win solution?
The industry reckons that the GST Council may consider the issue on merits and issue a clarification for the period July 2017 to September 2023 to be on as-is basis, on a case-by-case basis for platforms which have paid their taxes without committing any fraud. Essentially this involves dropping the retrospective tax.
On numerous occasions earlier, the GST Council has issued clarifications to resolve issues retrospectively and issue "as-is" clarifications for items such as raw cotton, pulses, ice cream parlours, solar projects etc. Such clarifications were also issued under the service tax regime for items such as aviation turbine fuel, services to airport, lease of industrial plots, services by Indian railways etc.
Similar grounds and more exist now for such a clarification from the GST Council for the past period, industry officials say. The retrospective tax demands have impacted the investor confidence, tax certainty, viability of an entire sector and also posing a threat to potential government revenues.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!