GST On Entry Fee Of Online Gaming Could Be A Big Setback For India’s $1 Trillion Digital Economy Plan
GoM’s current proposal to tax the entire contest entry fee cause permanent and perhaps irreparable harm to the online gaming industry.
It can effectively reduce tax collections from the industry, as most players will continue to game on illegal or grey online gaming websites without paying any tax.
The much awaited forty-seventh Goods and Services Tax (GST) Council meeting slated to be held on 28 and 29 June 2022 in Chandigarh is expected to decide on a range of substantive and procedural issues such as rate rationalisation, extending compensation to states beyond 30 June 2022, tinkering with the rates of few products, easing compliance burden of tax-payers and potential overhaul of the current slab structure.
Besides these crucial decisions concerning the future structure of the indirect tax system, the Council is expected to take a crucial decision that could decide the fate of the online gaming industry.
Touted as a sunrise sector with potential to become a $5 billion industry by 2025, the fate of the real money online skill-based gaming vertical, which is a significant portion of the broader online games and esports industry is set to be decided in the ongoing GST Council meeting.
GoM’s recommendations on online gaming, casinos and race courses
The GST Council by an office order dated 24 May 2021 had formed a Group of Ministers (GoM) to examine the valuation of services and taxability of transactions in casino, race courses and online gaming portals.
The GoM on 18 May 2022 prepared its final report and although the contents of the GoM’s recommendations have not been made public, as per reports in the press, the GoM has recommended a 28 per cent GST rate for online gaming, casinos and race courses, at par with lotteries, with online gaming being taxed at 28 per cent ‘on the full value of the consideration, including contest entry fee paid by the player for participation in such games without making a distinction between games of skill or chance’.
For casinos, the GoM has suggested that tax be levied at the rate of 28 per cent on the full value of chips/coins purchased from the casino by a player, but no tax be levied on bets placed in each round of betting, including winnings from previous rounds.
In the case of betting on race courses, the GoM has suggested a GST rate of 28 per cent on the full value of bets pooled in totalisators and placed with bookmakers.
Valuation methodology absurd
Although, platforms offering games of skill are currently paying GST at 18 per cent, there cannot be much quarrel on the GoM’s recommendation to increase the rate to 28 per cent.
Indeed, when other goods or services such as cement, aerated beverages, automobiles, air conditioners, cameras etc. are placed in the highest tax slab of 28 per cent, there is no reason why online games and gaming, which is a recreational activity should not be placed in the same slab, especially in the post-covid times when government is desperately looking to shore up its tax revenues and reduce fiscal deficit.
However, the major change recommended by the GoM seems to be on the method of valuation of online gaming, with the intention being to charge the ‘full value of consideration, including contest entry fees.’
It is a known fact that entry fees used to enter an online gaming contest form part of the prize pool which after deducting a small platform fee or commission of around 5-20 per cent depending on the kind of game, is distributed back to the winning player(s).
Currently, online gaming operators are rightly paying GST only on the revenue that they are making, i.e., the platform fee or commission that they are retaining from the customers and not on the entire prize pool.
The GoM’s proposal to make the entire contest entry fee, which is essentially distributed back to the players subject to a 28 per cent GST is as absurd as making a stock broker pay GST on the entire traded value of stocks rather than just the brokerage that he charges.
Similarly, even in case of purchase of foreign currency, only the commission retained by the forex agent is subject to GST and not the entire value of currency exchanged.
The GoM’s proposal to tax the entire contest value, which is an actionable claim not just defies logic but is also fraught with technical and legal difficulties, which may be susceptible to litigation and protracted court battles even if the centre makes amendments to the GST Act and Rules.
The GST Council will do well to send the narrow issue of valuation of services of online gaming platforms back to the GoM for reconsideration. It would be worthwhile if lawmakers remember Chanakya’s evergreen lesson on taxation:
Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower without causing any harm.
GoM’s current proposal to tax the entire contest entry fee cause permanent and perhaps irreparable harm to the online gaming industry and effectively reduce tax collections from the industry, as most players will continue to game on illegal or grey online gaming websites without paying any tax.
It is imperative that the GST Council reconsiders the GoM’s view on valuation of online gaming services to ensure that the industry is not plunged into uncertainty and existential crisis.
The writer is a technology and gaming lawyer based in Mumbai. Views expressed are personal.
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