The Centre has told the Supreme Court on August 5 while presenting rejoinders to the arguments presented by online gaming companies that the entire stake amount, or the ‘full face value of bet’, should be considered for taxation, as without stakes placed, the gaming entities would never supply any ‘actionable claim’, in this case betting and gambling.
The 'full face value' of bets refers to the entire amount of money (or its equivalent in chips or tokens) that a player wagers online regardless of whether it's a game of skill or chance. Actual transaction value means revenue earned by the online gaming platform for providing its services, essentially as commission or service fee that the platform takes from the total money involved in a game.
In October 2023, the central government had issued a notification ‘clarifying’ that a 28% GST applicable on online gaming is on the full-face value of bets. Since then, this has been a contentious point for the gaming industry as it significantly increases tax burden compared to the previous model. For instance, if you deposit Rs 1,000 with GST applied at 28 percent on the full-face value of the deposit, then Rs 280 is the tax outgo, leaving only Rs 720 for gameplay.
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Online gaming companies have said that the GST should only be levied on ‘actual transaction value’ (their commission/revenue) as that is the true ‘supply of service’ they provide.
In a written rejoinder, seen by Moneycontrol, Additional Solicitor General (ASG) N Venkatraman told the apex court, “For a player to enter into a game, it is condition precedent as per the terms and conditions that the stake amount is first paid by the player. This is because, it is the stake amount which would determine who the player would play against since the algorithm is designed in such a way that a player would play against another who has decided to stake the same amount.”
ASG Venkatraman added, “The moment stakes are placed, the player would become the recipient of an actionable claim supplied by the online gaming companies.”
As placing the stake is the first step in the transaction, the stake amount is undoubtedly in respect of and for the inducement of the underlying supply of goods, said the ASG.
“Consequently, the entire stake amount would constitute the consideration… as a natural corollary, it will also constitute the transaction value, which is the measure of tax envisioned under Section 15(1) (of CGST Act),” the ASG added.
The two interpretations of what constitutes as taxable amount, by the industry and government, has sparked legal and commercial debates.
Sandeep Sehgal, Partner-Tax, AKM Global said, “The government's stance treats player stakes transferred directly between participants as revenue earned by gaming companies, thereby interpreting 'consideration' under Section 2(31) of the CGST Act broadly, creating considerable legal ambiguity.”
“A more nuanced interpretation namely, taxing only the actual fees retained by platforms, would better align with both legislative intent and economic substance,” he said.
Rahul Shekhar, Partner - Indirect Tax at Nangia Andersen said, “The bets placed by players are in the nature of transitory stakes, which remain unsettled until the outcome of the game is determined. As such, they do not constitute consideration for a service at the time of placement. Upon placing a bet, a player acquires a contingent right to win but equally assumes the risk of loss. This uncertainty makes it inappropriate to levy tax on the entire face value of the bet.”
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