By: Sarthak Das
INTRODUCTION
The Goods and Services Tax Council (hereinafter “Council”) met last month to decide the tax rate on various items. However, it was the online gaming industry that suffered a taxing blow due to the meeting. The Council decided to impose a 28% levy on total funds deposited to play online games by consumers. More interestingly, the decision of the Council clubbed together “games of chance” and “games of skill” under the umbrella term of “online gaming”. The 51st meeting of the Council reiterated this tax rate and stated that it would be applicable from 1st October 2023.
THE STORY SO FAR
Taxation on the gaming industry has been a vexing subject for the state, ever since online gaming’s proliferation, with subjective questions of “chance” or “skill” frequently being adjudicated by multiple courts. To understand the issue, it is necessary to lay down the law before the Council’s decision. Online “games of skill” were levied an 18% GST only on the platform fee charged by the gaming platform. While “games of chance” were charged a 28% GST on the total bet value.
To illustrate how taxes worked before, for example; if a platform takes Rs. 100 from 5 players, collecting Rs.500 in total, and the prize pool is Rs.450 for the winner. The Rs. 50 deducted is the platform fee or “commission” charged. Earlier, the tax had to be paid on this commission earned for “games of skill”. This mechanism is known as the Gross Gaming Revenue (hereinafter “GGR”) method. The Council’s decision would imply that 28% tax would be levied on the aggregate value of money deposited by the players (i.e., on Rs. 100 by each player in our example). This has been coherently explained in an opinion piece which could be found here.
The response of the gaming industry has been disastrous, to say the least. Industry representatives said it would sap their earnings and the extra charges are likely to be passed on to customers. The All India Gaming Federation (hereinafter “AIGF”), described the decision as unconstitutional, irrational, and egregious. Other associations claimed that the tax would negatively impact the increasing FDI in the industry.
THE PRACTICAL PROBLEM
This decision is laden with problems, both pragmatically and legally. The practical problem is two-fold. One is financial and the other is related to taxation. Financially, the decision of the Council will wreak havoc on the industry, taking it to uncharted territory. Industry experts were reportedly questioning the decision of the Government in light of the favourable regulatory environment built up for online gaming in recent times. It is expected that the move is bound to have “far-reaching consequences for the industry and question its basic viability.” It is also likely to harm the lakhs of people employed by the industry.
Perhaps the only thing as renowned as Benjamin Franklin’s image on the $100 bill, is his saying that nothing in the world is certain, except, death and taxes. The gaming industry will now perhaps bear testimony to both (death and taxes) simultaneously. It was in this year’s budget, that it was announced that winnings from online gaming would attract a 30% Tax Deducted at Source (hereinafter “TDS”). This was done through an amendment to the Finance Bill, 2023. Thus, the status quo ante was a situation wherein if a player won Rs. 1,100, after paying Rs. 100 as an entry fee, Rs. 300 (TDS) would be deducted and deposited with the Government.
Assuming the Council’s decision is implemented, which seems to be the case, as the Revenue Secretary reportedly stated that the “decision has been unanimous and has been taken after due consultation and deliberation,” there will quite literally be double ‘tax’ trouble. This is buttressed by the Finance Minister’s statements after the latest Council meeting. Not only will individual winnings now be charged at 30% TDS, but gaming platforms will also be taxed at the highest possible GST tax rate. The latter’s taxable value will be the aggregate sum deposited, as explained above. This ‘burden’ of tax will eventually be passed down to the player, calling the viability of the entire online gaming industry into question.
The decision unsurprisingly, prompted Venture Capital firms like Sequoia India, Tiger Global et al to write a letter to the Prime Minister (PM) detailing many taxation scenarios, each of which would have a deleterious impact on the industry. For instance, imposing a 28% tax on net earnings would increase the tax burden by a whopping 55%. It is expected that such a scenario will disincentivize users from operating in India. Possibly leading to their shift to markets abroad or tax-evading gray markets in India.
THE LEGAL CONUNDRUM
The decision poses serious questions legally, with the AIGF claiming that it “ignores 60 years of settled jurisprudence on the subject.” The principle issue is that the decision consolidates all games (skill and chance) into one category. There are two issues with such a treatment. Firstly, the distinction between “games of skill” and “games of chance” has been used by courts to determine whether an activity is gambling or not. This has been authoritatively held by the Supreme Court in R.M.D Chamarbaugwala (hereinafter “RMD”). It was concluded by the court that “the difference between the two classes of competitions is as clear-cut as that between commercial and wagering contracts.” The reference is made to games of “skill” and those of “chance”. Summarising, the court stated that when its (type of competition/game) true character is determined, it must fall either under the one or the other. This distinction had been fundamental to the way, games were treated for the purpose of taxation. The Council’s decision will now put games of skill at par with wagering contracts like betting and gambling.
Although, RMD did not involve online gaming, the underlying principle behind the decision still holds. In 2021, the Madras High Court struck down the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 which imposed a ban on playing online games such as rummy and poker with stakes. The High Court noted how every sport and game is invariably governed by ‘some’ element of chance. However, the court while squashing the umbrella ban, once again emphasized the distinction between a game of skill and a game of chance. It placed reliance on the K.R Lakshmanan judgment, which held that the distinction between a game of “skill” or “chance”, is based on the preponderance of the skill element involved. This is the reason why rummy is a game of skill, while blackjack is a game of chance.
More recently in the Gameskraft case, the Karnataka High Court quashed the GST Notice of around Rs. 21, 000 crore and held that online/digital rummy games and other online games are not taxable as betting and gambling.In this case, GST was being levied on the entire sum contributed by players to the prize pool. The Court rightfully accepted the contention that those monies are merely held in trust by the companies. Gameskraft along with other intervenors claimed that the entire (online gaming) industry itself is not worth Rs. 21, 000 crore, laying the proposition of taxing them that much moot. Once again the Court recognized and relied on the distinction between “games of skill” and “games of chance” to quash the show cause notice issued by the GST Department.
THE PARADOX
The decision of the Council brings forth many paradoxes to the forefront. Back in 2022, the Union Government had designated the Ministry of Electronics and Information Technology (hereinafter “MEITY”) as the nodal ministry for online gaming. The Government had then amended the IT rules, to allow for self-regulatory bodies (hereinafter “SRB”) to verify whether an online game is permissible under the rules or not. Essentially, a SRB had to determine whether a game was a “game of skill” or involved wagering on any outcome (chance). The rationale behind this, was ostensibly to bring clarity to the tax rate applicable to different types of games. Since, games of skill and chance were treated differently from a tax perspective, as mentioned in Part II. Now the Council’s decision effectively renders the amended rules of MEITY otiose, as all online games would be taxed uniformly.
Another paradox that emerges, is that globally, gaming companies are taxed at a uniform rate on the GGR. This mechanism recognises the fact, these companies merely operate platforms holding the money as a fiduciary, having no rights over the money deposited by players. Their income stems from the platform fee (GGR) they charge. Countries like the USA, Sweden, Germany, Denmark, and Belgium all follow the GGR model of taxation. The United Kingdom recently shifted to the GGR model to prevent the exodus of the gaming industry to offshore locations. This strengthens the argument that the Council’s decision would indeed be a step backward for the industry as a whole.
To sum up, it seems the Council’s decision is one marred by paradoxes. Perhaps the biggest one is the conflict between the Government’s aim to maximise revenue, while at the same time, treating online games as a ‘sin’ good. This can be observed from the repeated attempts to control the “evil effects” of online gaming on children and families. With the council reiterating the tax imposition despite opposition from a few states, the gaming industry is bound to suffer from the ‘killer’ blow dealt by the Government. Only the Council’s decision to review the tax after six months will tell the story of its impact on the industry.
(Sarthak Das is law undergraduate at Government Law College, Mumbai. The author may be contacted via mail at sarthakdas956@gmail.com )
Cite as: Sarthak Das, Tax Burnout: Fallout 4 the Gaming Industry, 30 October 2023)<https://rmlnlulawreview.com/2023/10/30/tax-burnout-fallout-4-the-gaming-industry/ >date of access.
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