Courts must look at multiple factors
Indian online gaming sector represents one of the fastest growing sectors in the media and entertainment space. Favourable demographics, technology, smartphone penetration with immersive graphics, affordable data services have provided a turbo boost to the sector. As the sector draws massive growth potential, there are regulatory and tax challenges in the backdrop of moral, social and cultural narratives.
At present, GST laws for games of chance that are in the nature of betting or gambling and game of skill are vastly different in terms of both, tax rate as well as value on which tax is to be charged. The game of skill are generally understood to be taxed at 18 per cent GST on the platform fee also called as Gross Gaming Revenue (GGR) or the rake fee. Game of chance that is in the nature of betting or gambling is taxed at 28 per cent GST on the contest entry amount.
Skill vs chance
Given that there is no definition of what constitutes as game of skill or of chance, the issue is now in the Courts, which will decide on the value of game and applicability of tax rate. This determination in a way has a dependency on the State regulations and the characteristic of the respective game, that is, whether the predominant aspect of the game is use and degree of skill and judgment involved as compared to that of a chance. There is no consistency, and this determination differs from game-to-game.
In order to bring in clarity and certainty, the GST Council has constituted a committee of Group of Ministers (GoM) to examine the tax issues on casino, horse racing and even online gaming in consultation with the State governments.
The key points for consideration are: (a) determine parameters for classification for game of skill or game of chance, (b) rate of tax, and (c) valuation i.e., value for charging tax. Some months back, the media reports suggested that the GoM has recommended to levy 28 per cent GST on all online gaming to bring it on par with betting and gambling and value to be the contest entry amount and not GGR or the platform fee for all types of online games.
However, here it is imperative to understand that charging GST on the contest entry amount would mean levying tax on the component, in case of real money games or online fantasy games, that is not the consideration for the gaming operators but is a contribution to the prize pool.
However, according to media reports, at present, the GoM is considering the Constitutional and legal differences between online gaming and betting, casinos and horse racing. GoM is also considering taking a legal view to decide on the GST rate and valuation for each game type.
One needs to consider that online gaming has a wide spectrum of games ranging from casual games, real money games and fantasy games. This question is extremely relevant in the context of online games that are treated as ‘game of skill’ since at present only GGR is taxed as the consideration towards online information database access and retrieval service (OIDAR).
To add to the complexity, one would also need to evaluate the GST position on online gaming where the transactions are done through cryptocurrencies once the GST framework surrounding cryptocurrencies are notified.
There are fears that charging GST on entry fee or stake would force the operators to pass on the higher GST burden to the players, which could directly impact players’ winnings and growth of industry.
In this backdrop, the online gaming sector expects that effective implementation of the proposed taxation regime for the sector should duly consider all aspects of nuances of games, growth potential, administrative ease, simplicity, international best practices and fiscal economics.
Gandhi is Partner, Chaturvedi is Director and Gada is Senior Manager, Deloitte Haskins & Sells LLP. Views expressed are personal