NEW DELHI: Online poker and fantasy games is set to get costly as a group of state finance ministers set up to explore the quantum of GST and mode of taxation on casinos, racecourses, and online gaming has unanimously proposed a flat 28 per cent goods and services tax (GST) on these activities. The group is said to have proposed that casinos be brought under the 28% tax slab while the tax will be only on the amount paid at the time of buying the betting instruments at entry and not on every betting transaction.
The panel of ministers, which met last week, also decided that the tax will be levied on the entire “face value” or “bet amount” and not on the total transaction value. Total transaction value includes the prize money, or the net commissions (revenues) that accrue to gaming firms. These recommendations will be sent to the Goods & Services Tax (GST) council for approval.
The online gaming industry that operates skills-based games like e-sports, rummy, poker, chess, and fantasy games has been lobbying for GST to be capped under 18%.
They had backed the demand with a claim that a move into the higher tax bracket would derail the $2.2 billion industry that has 400 players and employs around 45,000 people.
Currently, the GST rate applicable on online games involving betting or gambling is 28%, and the rate on games not involving betting or gambling is 18%. A tax rate of 18% is also levied on the commission collected by the online gaming platforms for each game.
The industry believes that a high GST rate will make the entire online gaming industry unviable.
Is online gaming even legal?
"One of the most crucial parameters in determining the legality of online fantasy games is whether such a game ispredominantly a ‘game of skill’ or a ‘game of chance’. With respect to online fantasy games, there have been numerous court rulings to lay down the jurisprudence on determining the legality of such online games. Broadly, the position of law with respect to fantasy games as per the rulings of several High Courts including the Hon’ble High Court of Punjab and Haryana, the Hon’ble Bombay High Court, Hon’ble High Court of Rajasthan as well as the Hon’ble Supreme Court of India, can be said to be settled in favour of the notion that fantasy games are ‘games of skill’ and do not fall within the purview of gambling and/or betting," said Amay Jain, Senior Associate, Victoriam Legalis – Advocates & Solicitors.
Nevertheless, the said position is subject to change in laws, interpretation, and application of law by courts in various cases that arise..For instance, earlier in October 2021, the Karnataka state government had amended the Karnataka Police Act, 1963, to effectively render fantasy gaming as a non-bailable offence. However, later the Karnataka High Court struck down such amendment as ‘unconstitutional’ and held that online fantasy gaming shall be left out of the ambit of activities being declared as a non-bailable offence by the state government.
“Presently the legal regime for online gaming is a confusing matrix of a different state laws, central laws and judgements by various courts which have the effect of law. Some of these laws predate the online era of gaming. It is a welcome move to have a central committee evaluate and recommend a modern regulatory regime that’s uniform and attempts to keep up with the developments in the sector. One of the key elements would be to have a clear and well-defined distinction between games of skill and games of chance. The same treatment cannot be given to online betting on horse races as given to selecting a fantasy cricket team and winning money as per the real-life performance of the players or to playing Call of Duty or Fortnite online where there is zero element of chance," said Shoubhik Dasgupta, Partner, Pioneer Legal.
In absence of a unified code on gaming, different courts have taken differing views on how to treat online games. Barring few exceptions, games of skill when played for stakes are excluded from the gambling bans in most Indian states. "With the increase in interest in this sector, a uniform regulatory regime clarifying on aspects relating to tax implications etc. appears to be the way forward," said Rishi Anand, Partner, DSK Legal.
When is indirect tax charged?
International experience in the skill gaming suggests that the indirect tax is generally charged on the gross gaming revenue or rake fee that i the revenue earned by the gaming operators. If the platform offers game of chance that is characterized as betting or gambling, then the tax is applied on the entry fee or the wager.
" With the proposed convergence of GST rate by GoM at 28% for online gaming, it will be interesting to see how the valuation mechanics would be prescribed for skill-based games. The expectation is that in line with international practices, the value for online gaming should be the gross gaming revenue or the rake fee (platform fee) and not the entry amount or stake. This is a critical aspect that also needs immediate consideration to give clarity to the sector. It is apprehended that charging GST on the entry fee or the stake would mean that operators will then possibly have to pass on the higher GST burden to the players. In such a scenario, player’s winnings could get squeezed and could get discouraged. Consequently, this may impact volumes, overall value economics and may also affect the compliance behavior," said Hardik Gandhi, Partner, Deloitte Haskins & Sells LLP on online gaming and taxation.
Currently, most online gaming platforms pay 18 per cent on the commission collected by online gaming platforms for each game, while those involved in betting or gambling attract 28 per cent. On horse racing, GST is levied at 28 per cent on the total bet value. World over, the fees from online gaming is taxed in the range of 15%-18%.
According to a report by Copenhagen Economics " the tax-rate should not exceed 20%. The reason being that at higher tax-rates, gaming operators as well as consumers will choose not to join the licensing system.’ The report shows how France, which levies an extremely high tax rate on GGR (of approximately 37% on online poker and 45% on sports betting), achieves a per capita tax revenue of merely 41% of that of the UK, which levies a 15% tax on GGR.
GST authorities, meanwhile, have issued notices to various industry players, proposing to recover incremental GST owing to the valuation dispute. However, the Punjab and Haryana High Court provided much-needed relief recently, by directing GST authorities not to take any coercive action till a clarification is available from the government.
What does the industry think?
An increase in taxation would not only have a catastrophic impact on the industry, but also encourage offshore operators who would circumvent Indian tax jurisdiction by hosting games in some other country, Games24x7 Co-CEO Trivikraman Thampy said. "It would be a triple whammy — the industry loses out, the government loses out on tax revenue and players lose out as they would be exposed to unscrupulous operators," he said. An association of online skill-based gaming platforms has made a representation before the authorities for retaining Goods and Services Tax (GST) at the current level for the industry which has 400 companies employing about 45,000 people.
According to Thampy, GST is currently charged on platform fee, termed as Gross Gaming Revenue (GGR), rather than on the entire amount pooled in for a game. "International best practices also highlight the optimal taxing bracket for the online gaming industry between 15 and 20 percent. Our current GST rate at 18 percent is in line with best practices and reduces the incidence of illegitimate operators," he said.
Online games of skills are inherently different from games of chance, and that the skill-based gaming industry does not constitute to gambling or lottery, he added.
What about personal tax?
Winnings from lottery and gambling such as poker are subject to tax. India imposes TDS or tax deductable at souce, to all winnings from gambling. Under section 194B of the Income Tax Act, winnings from lotteries and games have a corresponding TDS of 30% provided the amount is at least Rs. 10,000, excluding cess. The net rate after cess amounts to 31.2%, without the benefit of the basic exemption limit.
For online poker, the tax is automatically deducted from your winning. Once you receive the payout, you will no longer be required to pay for other taxes. However, if TDS is not deducted from your winning, you will be obliged to file for income tax within 30 days after receiving the amount.
For example, Mr Pinto earns Rs 2 lakh as annual income and has also earned Rs 30,000 from online gaming. His income is below the basic exemption limit. i.e. 2.5 lakhs. But Mr Pinto will still have to pay 31.2% tax on Rs. 30,000 including cess. But after that, no Deduction or any expenditure will be allowed to be applied to any such income.
