GST in online gambling – explained
On May 25, 2021, the GST Council held its 43rd meeting and formed two Groups of Ministers (“GoM”). The GoM’s objective was to address issues related to: i) capacity based taxation and special compounding regime in some sectors on GST; and (ii) casinos, racetracks and online games. (More sports news)
In recent developments, the GoM submitted its report on the above two issues to the Center last week. The minutes of the meeting or the report itself are not yet in the public domain, comments from GoM members and the press stated the following:
- The report’s recommendations propose increasing the rate of GST levied on online gambling companies from 18% to 28%; and
- It is proposed that the amount on which GST will be levied will be “gross gaming revenue” and not “per transaction” or on “each bet amount”.
While it appears the discussion was conclusive and a final report has been submitted for deliberation at the next GST Board meeting, the proposed changes could have many ramifications.
How GST is calculated in online games
Currently in India, gaming platforms are required to pay GST as they qualify as “suppliers” of services under the GST Act.
For the purposes of paid games, a portion of the token fee paid by a user to a platform to use its services is usually deposited into an escrow account (kitty), and a portion is charged by the platform as a platform service or fee by the operator (gross gaming revenue or GGR).
The prize pool is transferred to winners’ accounts when they win a game.
Currently, GST is levied on the GGR at the rate of 18%.
Powers of GST Board
The GST Board derives its powers from Section 279(1) of the Constitution. It comprises the Union Finance Minister as Chairman and the Union Ministers of State responsible for Finance Revenue and the Minister responsible for Finance or Taxation or any other Minister appointed by each Government of State as members.
Section 279 A (4) of the Constitution grants the GST Board the power to make recommendations to the State and the Union on essential matters relating to the GST.
While successive memos have been published regarding the evolution of online gambling taxation, none has specified the details of the evolution in percentage or appropriate quantum.
Moreover, the speculation circulating in the news does not clearly define how and where the increase in the tax rate will be applied in the broad-based gaming industry.
Impact and constitutionality
If one were to consider the recommendations of the GST Board according to speculation and reports, an increase in the GST rate of 10% for online games essentially puts paid skill-based games in the same bracket. tax than that of the lottery and horse racing.
Moreover, in such a scenario, the burden of paying the GST ends up falling on the user. Taxing skill-based gamblers the same as lottery gamblers was never the intent of gaming case law.
In terms of implementation and allocation, to implement whatever the recommendations, some necessary amendments will have to be made to the GST Act.
Currently, according to Annex III(6), “claims giving rise to an action other than lottery, betting and games of chance do not constitute a supply of goods or services”.
It means activities related only to; lottery, betting and games of chance are subject to GST and, except for these three items, no actionable claim will be covered by GST under Schedule III.
Paying to play games of skill online does not operate on similar factors to lottery betting and gambling, which may require a change in law for a “games of skill” exemption.
At a time when we have seen a series of legislations and amendments to the police law of states such as Kerela, Tamil Nadu and Karnataka and their subsequent challenges to constitutionality, over the past year , courts have repeatedly ruled that skill-based games should not be dealt with. in the same way as lottery/betting and horse racing.
That said, the recent Supreme Court decision in the Mohit Minerals case should also be considered when assessing the impact of these recommendations.
Even if the recommendations were to be evaluated, their promulgation seems unlikely at this time. The Supreme Court ruled Thursday that recommendations made by the GST Board are not “binding” on the Center or the states and are of persuasive value only.
Pivoted by COVID 19 and the inclusion of esports in the Asian Games and the Olympics, the gaming industry has seen an increase in investment and participation by multiples over the past year. Statista says the increase has risen from INR 90 billion in 2020 and will reach INR 143 billion by the end of this year.
India is a huge consumer of online games ranging from casual gamers to professional esports athletes, game developers, game companies and their employees.
Since the globally accepted online gambling tax rate is between 8-15% and they are not regulated by Indian laws, the ultimate impact of this increase will be the payment burden of GST on platform users, which will only result in a shift of users to more commercially viable platforms and hence increased participation by offshore entities.
One can only hope that the report and recommendations lead to the development of fair laws, the only intelligible approach to encourage this sector which is often stuck in debates and archaic laws.
(Shiva Jha is a technology policy lawyer and his views are personal)