The Goods and Services Tax Council ('GST Council'), in its 50th meeting held on 11th July 2023, has recommended the levy of 28% GST on the full value of bets placed by the users. The decision comes in the wake of much deliberation that has taken place over the last few years on the contentious issue of the levy of GST, with two primary aspects being debated: (i) what would be the rate of tax (whether 18% or 28%)?, and (ii) on what amount would such tax be levied (whether on the full amount received from the user, or the gross gaming revenue ('GGR')?).
The Group of Ministers ('GoM') constituted in 2021 to examine the issue of levy of GST on online gaming (besides other sectors such as casinos and horse-racing), submitted its first report in June 2022. The GST Council, however, directed that the GoM relook into the issue and the GoM subsequently submitted its second report in December 2022. In such report, the GoM concluded that since no consensus could be achieved on whether the activities of online gaming, horse-racing, and casinos should be taxed at 28% on the full face value of the bets placed or on the GGR, the GST Council may decide upon the same.
As such, the GST Council, in its 50th meeting held on 11th July 2023, has recommended the following:
Suitable amendments to be made to the GST law to include online gaming and horse racing in Schedule III as taxable actionable claims.
All three, namely, casinos, horse racing, and online gaming to be taxed at the uniform rate of 28%.
Tax will be applicable on the face value of the chips purchased in the case of casinos, full value of the bets placed with bookmaker/totalisator in the case of horse racing, and on full value of the bets placed in the case of online gaming.
Analysis
The GST Council recommendations make the legal position clear, though the recommendations have been received with extreme concern and anguish by the online gaming industry. The following legal points are noteworthy as arising from the recommendations:
Supply of goods: Inclusion of 'online gaming' within the fold of actionable claims would mean that the supply of online gaming would be treated as a supply of goods, since actionable claims are specifically included within the definition of 'goods' under section 2(52) of the CGST Act, 2017. The supply of goods is anyways taxed at full value of the consideration without any abatement. This recommendation rests the controversy as to whether the supply of online gaming is a supply of goods or supply of services.
No distinction between games of skill and games of chance: As per the recommendations, the levy is to be without any distinction between 'games of skill' and 'games of chance'. To reiterate, 'games of chance' are considered as gambling or betting as per settled jurisprudence and as such they were already covered under Schedule III, Entry 6. On the other hand, 'games of skill' was the subject matter on which the levy of GST was unclear. So far, online gaming companies operating games of skill were paying GST on the GGR (i.e., the total amount collected from users less the winnings paid out). In other words, they were paying GST only on the fees or amount that they retained with themselves for operating the platform or conducting the games. This distinction has now been recommended to be completely done away with.
Possible amendments: The recommendations state that the law would be amended to incorporate the proposed change in the tax regime. One may expect the following amendments to be made:
Entry 6 of Schedule III of the CGST Act, 2017 would be amended to exclude 'online gaming' from actionable claims which are treated as neither supply of goods nor supply of services.
Definition of 'online gaming' would need to be provided under section 2 of the Act. One may forecast that the definition would be on the lines of the definition of 'online game' under the recently amended Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021.
For the purpose of valuation, Rule 31A of the CGST Rules, 2017 would be amended to provide for valuation in case of supply of online gaming.
Multiple levy to be avoided: Given the manner in which the online games take place, it is possible that if the amendments are deficient, they may result in the levy of GST multiple times. For instance, a person may play successive games after depositing money from his bank account to the online gaming platform. In such succession, the winnings from one game would be used as the entry fee or the bet amount of the subsequent game(s). If GST is levied on each such game, the effective tax rate would be much higher than the so-apparent 28%.
Amendments to be prospective / retrospective: Regarding whether such amendments could be made applicable retrospectively, one may note the following:
Since the amendments are affecting substantive rights and liabilities, the amendments should prudently be prospective in nature.
In case the amendments are made applicable retrospectively, even then the courts would suitably read down their applicability to be effective only from the date when the amendments were notified.
Authored by the Editorial Team, Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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