The Goods and Services Tax (GST) Council, India’s apex decision-making body on indirect taxes, must differentiate between skill-based and betting-based online games before taxing them, a former chairperson of the Central Board of Indirect Taxes and Customs (CBIC) said.
“It would be important to maintain a distinction between online games which are skill preponderant and games that are in the nature of betting, wagering and gambling. The GST law already provides for taxing actionable claims in betting and gambling,” John Joseph, former Member (Policy) at the CBIC, and currently a strategic adviser at DeepStrat, a New Delhi-based Strategic Consultancy and Think Tank, told Moneycontrol.
“However, it would be an act of folly to extend the application of the same concept to services offered by online gaming intermediaries, which are constitutionally protected,” he added.
Why the issue is not solved yet
The issue of indirect taxation of online gaming has been hanging fire for a couple of years.
The GST Council had, in May 2021, set up a Group of Ministers (GoM) on casinos, race courses and online gaming. The GoM had reportedly agreed on a 28 percent tax, irrespective of whether it was a game of skill or chance.
There has also been a lack of consensus on whether GST should be levied only on the fees charged by the portal or the entire consideration, including the bet amount.
As of now, online gaming that does not amount to betting, attracts 18 percent of fees charged by portals as GST.
Meanwhile, the central government has notified rules for online gaming, proposing self-regulatory entities to permit so-called online real money games. It has also imposed Tax Deducted at Source (TDS) on net winnings from online games at a rate of 30 percent.
The recent legislative and regulatory developments provide further clarity in terms of the difference between online games of skill and those games which may be in the nature of betting, gambling and wagering, Joseph said.
“The definition and the associated rules brought out by the Ministry of Electronics and Information Technology (MeitY) are part of an important step in encouraging the gaming ecosystem in the country. The definition is a very significant move as it confers legal status on online gaming and recognises the industry from the regulator’s perspective. In fact, it is a progressive move that co-regulation has been proposed in the rules, given it is a very innovative and emerging sector,” he added.
‘Not all online games are the same’
Still, the GST conundrum continues to play out and a blanket approach of viewing all online games to be of the same nature is the crux of this problem, Joseph said.
“It is essential to unpack the different kinds of online games and identify that some of them do not involve any element of betting or gambling or wagering. Once such a distinction is made, the question of imposition of GST and at what rates can be deliberated in a more rational manner,” he added.
Moreover, the basis for taxing online games of skill should only be the platform fee or the gross gaming revenue, whereas for betting, gambling and wagering-related games, the entire prize pool should be taxed, he suggested.
Instead of the government defining and distinguishing every game as to a game of skill or a game of chance, it should enlist the industry in this effort, Joseph said.
“Online skill gaming is a legitimate business, and it must be effectively reflected across all measures, such as taxation, intermediary status etc. Support and growth of this sunrise sector will enhance transparent revenue collection and strengthen investor confidence,” Joseph said. “Accordingly, a calibrated reassessment by the GoM/ GST Council will go a long way in ensuring the well-being of the industry.”
A report by Lakshmikumaran & Sridharan Attorneys suggested that the proposed GST must be based on gross gaming revenue instead of the total amount. The law firm also highlighted that the most mature and developed nations have capped the tax rates between 15 and 20 percent on the gross gaming revenue.
Realisation of the online gaming industry’s potential is subject to a fair and certain taxation framework, L Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys, said.
“The GST Council should consider the factual legal position, expectations of the industry and implement global best practices to provide a conducive taxation regime and not levy a heavy 28 percent GST on the total value of consideration,” Narayanan suggested.