Online gaming companies are preparing to battle it out in courts following show-cause notices for paying 18 percent GST (goods and services tax) instead of 28 percent prior to October 1. While the firms contend that 28 percent GST is applicable only from this month when the revised law came into effect, the government claims the October 1 revision only brings clarity, and that the law was already in force prior to that.
Certain revenue officials, however, say that prior to the October 1 amendment, the law was a bit of a grey area.
“The law was not very clear, and there seems to be a retrospective application of the law. Which is why our earlier notices demanding unpaid GST were quashed by the court,” a senior government official told Moneycontrol.
On the tax being applicable even prior to October 1, online gaming firms are likely to argue that the government could have issued a clarification instead of making changes to the law effective October 1, if the provisions in the GST Act always taxed real money games at 28 percent, without distinguishing between games of skill and chance.
“The strategy is to challenge the notices on the lines that why would there be a need to prospectively amend the law if it was already so clear. The government has issued clarifications in the past even after the budget, the same could have been done in this case,” a person directly involved in the matter said.
Challenged in court
The fact that “the issue has been debated by the GST council for the last four years shows that there was ambiguity on how to tax the gaming industry,” said Asish Philip Abraham, a partner at Lakshmikumaran & Sridharan, a law firm. Abraham also said that the government’s treatment of all online real money games on par with betting or gambling was erroneous.
Pratik Jain, national leader, indirect tax, PwC India, agrees that the law prior to October 1 may not have been quite clear.
Gaming firms like Dream Sports and Gameskraft have challenged the tax demands by GST authorities in various courts. While the Supreme Court is hearing the matter pertaining to a demand of Rs 21,000 crore for alleged GST evasion by Gameskraft, Dream Sports, the parent company of Dream 11, has lodged a writ petition in the Bombay High Court contesting a claim said to be around Rs 25,000 crore.
Previously, online gaming companies paid 18 percent GST on platform fees for skill-based games, while betting and gambling fell under the 28 percent slab. The provision under the GST law on taxing betting and gambling is now being invoked in the case of online gaming platforms, regardless of whether the games are of skill, or of chance (like gambling).
Retrospective application
In August 2023, the GST council amended the indirect tax law to clarify that all online games involving wagers, irrespective of whether they are based on skill or chance, will attract a GST of 28 percent on the full value of the bets placed, and not on the gross gaming revenue (GGV), from October 1.
However, the notices for the period before this date seem to be retrospectively stemming from these October 1 amendments, with tax officials saying they calculated the dues by levying a 28 percent tax on the full value of the bets placed.
For an online gaming firm, GGV is the total value of the bets placed, less winning payouts.
“The government's understanding is that anything played for a stake, whether a game of skill or chance, is taxable at 28 percent because it's akin to betting and gambling. Despite being skilled in cricket, you may not win anything on Dream 11. Thus, there is no skill, only chance. However, the courts have earlier quashed the tax notices saying such games are more about skill than chance,’’ the official said, adding that the centre will leave it to the courts to decide whether the notices sent for the period prior to October 1 for 28 percent GST are valid or not.
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