Gaming: GST doldrum and conundrum continues


In the last five years, proliferation of smart phones, cheap data plans, ease of digital payments has led to an establishment of a flourishing gaming ecosystem. Thriving gaming sector has generated a lot of interest from investors, content creators and owners, opened up new opportunities for monetizing the intellectual property rights and tech-based platforms. Higher disposable income and spend on entertainment has given a lot of opportunities for innovation in the sector. Natural progression can be seen in the world of non-fungible tokens, blockchain technologies and metaverse based games.

Marketing opportunities in India have witnessed exponential growth in the gaming user base of 300 million during the lockdown constituting an average growth of 28 per cent on year-on-year basis.

The nascent gaming sector has faced multiple regulatory and legislative hurdles from time to time. Various High Courts have given relief by setting aside the bans imposed on online games of skill. However, the tax conundrum continues for the gaming sector. Dwindling revenue base and expiry of the period for paying Compensation Cess has led to Government setting their eyes on gaming and crypto taxation for increased tax collection with tweaking of rates and allied provisions.

After the meeting of Group of Ministers (GoM) on Casinos, Race Courses and Online Gaming held on 18th May 2022, the GoM has informed about their consensus on increase in the GST rate from 18 per cent to 28 per cent on all online games along with races and casinos. In light of the above recommendation, it becomes pertinent to discuss the impact on the sector.

Constitution of GoM on Casinos, Race Courses and Online Gaming

In the year 2019, the GST Council in its 37th and 38th meeting extensively deliberated crucial GST issues of categorizing and determining the valuation of supplies made by the online gaming industry, including casinos and race-courses. Thereafter, the council contemplated to setup the GoM to exclusively examine these industry’s issues on GST rate along with value on which GST shall be levied i.e., on Gross Gaming Revenue (GGR)or on adhoc percentage basis/ deemed value or on entry fee/ face value/ bet amount collected or otherwise. Consequently, a GoM was set up in May 2021 and the same was reconstituted in February 2022.

GST being transaction-based tax and can be levied on consideration charged for facilitating the games

A gaming platform facilitates a game of skill among the players. Gaming operator is supplying services to players with respect to providing a platform for participating and giving a chance to win in a game based on pre-published rules. The platform provides a virtual playground on payment of platform fees. For the services supplied by gaming operator, the consideration is received in the form of platform charges (GGR). The GGR received by the gaming operator constitutes consideration u/s 2(31) and GST is leviable only on the GGR for facilitation services supplied by the gaming operator as per Section 7 of the CGST Act. This is in line with international practices on taxing GGR.

The price pool for a game of skill constitutes actionable claims, other than lottery, betting and gambling. Thus, in absence of supply, GST is not leviable on the price pool contribution distributed amongst the winner(s) for a game of skill. The prize pool does not constitute consideration u/s 2(31) for any supplies made by the gaming operator, as the same is neither permanently retained by the gaming operator nor is the income of the gaming operator.

Proposal of GoM on rate and valuation: Detrimental to the Indian online gaming sector

Keeping game of skill and game of chance at par and taxing both the games at sin rate of 28 per cent will be detrimental to the nascent Indian online gaming sector. Simultaneous change in GST rate and valuation mechanism for levy of GST from platform services to entry fees will adversely reduce the prize pool to be distributed amongst the winners by approximately 30 per cent.

The proposal to levy GST on the initial betting and gaming amount lacks clarity on valuation to be adopted for different gaming formats and will result in different end results. GST is a transaction-based tax, levied on supply of goods or services for a consideration. The GGR received by the gaming operator should only be the consideration for supply of services. Taxing the entire entry fee or bet amount would be a deviation from the principle of taxing only the consideration for supply of services. This will entail levy of tax even on actionable claim in the form of prize pool to be distributed amongst winners, where the element of service is absent. The same has also been considered by Karnataka High Court wherein it was held that Rule 31A(3) of the CGST Rules is ultra vires the enabling Act.

The Council should adopt the international practices in relation to valuation of GGR instead of adopting deemed value or entry fee. The GGR varies on game-to-game and format to format basis, and thus, higher deemed value will be detrimental to the gaming sector directly affecting the prize pool for the users and revenue of the gaming operator. Deemed value will reduce innovations and affect the players by artificially creating tax uniformity among varied gaming formats. Deemed Value, if any, adopted should be in line with the realistic practice followed for each format. The proposal of GoM to levy tax on entry fees or bet amount is not in line with the current international practice of taxing the GGR.

It is important for the GST Council to adopt appropriate GST rate and valuation mechanism. The well-established legal jurisprudence of the Supreme Court treating game of skill different from game of chance, should be taken into account by the GST Council before determining GST rates and valuation mechanism. Adopting deemed value or entry fee as value of supply will hinder innovation, push the organized gaming sector towards grey market, encourage onshore gaming operators and discourage new players and operators in the sector.

The final decision of GST Council on the GST rate and valuation issue will decide the fate of startup gaming platforms and rising gaming industry’s future growth in India.

(The authors L Badri Narayanan is an Executive Partner at the firm, Asish Philip Abraham is a Partner at the firm.)

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