Historically, taking a cue from the global practices, GST or Value Added Tax was paid on Gross Gaming Revenue by the online gaming businesses in India. Today, as a consequence of the decision, the entire judicial lineage of the difference in classification between games of skill and games of chance has been negated. A direct fall out of this decision is the issue of whether the decision of the council is clarificatory and therefore has a retrospective application or has a prospective application. This is important for the purposes of estimating the past period liabilities of the businesses (if any). Some of the businesses have already received show cause notices for the period 2017-18 and should such liabilitiescrystalise, the businesses will be required to cough up the tax, interest and penalty. Further, the effect on the business will be that the input tax credit of the GST paid shall not be available to these businesses as the same will be paid pursuant to a show cause notice- thereby having a forceful impact on the top line of the businesses.

It is also interesting to note that with GST being made applicable on the full face value of bets, the businesses are trying hard to hold on to their customer base by promising them full credit of the stake made and consequently, absorbing the GST impact. While this retention strategy is resulting in a cash flow issue at present, it will be interesting to see for how long the businesses are able to continue with this practice. Also, needless to add, while it may be feasible for the big businesses to apply this retention strategy, the same may practically not work for smaller businesses, who may be forced to shut shop – leading to loss of jobs and revenue for the economy.

Amendments have also been made to make it compulsory for an offshore e-gaming company allowing access to users in India, to be registered in India. To enable such registration, a simplified scheme of registration has been provided for in the GST laws. To ensure compliance with the registration provisions, the GST law now provides that any kind of access, of any service or platform provided by such offshore company, by any user in India, will be blocked. Further, any information generated, transmitted, received or hosted, in any computer resource, used for supply of online money gaming, by the non-compliant supplier, shall also be blocked as a consequence of non-compliance of the registration provision. While, stringent measures have been built in the GST laws, as per data available in public domain, no new offshore players has registered so far. With the Enforcement Directorate crackdown on foreign registered online gaming companies suspected of money laundering, earlier this year, it should only be a matter of time before the non-compliant offshore e-gaming businesses are tracked by the GST authorities, since it is clear that the authorities are taking akeen cognizance of non-compliance in this sector.

Certain other challenges that emanate from the amendments come from the fact that in order to define the concepts, definitions of ‘Online Gaming’ and ‘Online Money Gaming’ have been inserted in the GST laws. Online gaming means games are offered without deposit of money or without expectation of winning any money and is treated as a service of Online Information Database Access and Retrieval Services (OIDAR). Whereas, online money gaming is defined to mean games, which involves a deposit of consideration in any form: whether cash, crypto assets or other digital assets, or other, in return or expectation of any winnings and is taxed as an “actionable claim”, which is goods. Different treatment being accorded to online gaming services and online money gaming which are treated as goods, will result in separate compliances in terms of time of supply etc. for both the categories.

Under the Direct Tax regime, the Government has specifically introduced Rule 133 of the Income Tax Rules to outline the procedure for the computation of net winnings. Various aspects such as bonuses, referral fee and the deduction of stake amount have been addressed vide this Rule to bring some clarity for the gaming operators. Though a more nuanced policy distinguishing professional gaming from causal gaming may be notified by the Government, the introduction of the said Rule has brought in some clarity for the gaming sector. The gaming industry already grappling with the burdensome TDS liability of 30% on net winnings, are yet again faced with the high slab of GST rate of 28% on the entire amounts staked by the users.

While in the first brush, it appears that the amendments will increase the revenue collection for the tax authorities, this will have a negative impact on the businesses especially since the businesses are willing to take the hit of GST and pass on the full stake value to the gamers. Consequently, the country has already started witnessing a decline in the gaming volumes, layoffs, shut down of small-scale operators and sustainability of gaming operators. This is likely to impact India’s promising tech export potential by shaking the investors’ confidence who have been regularly investing in the gaming industry. Further, due to the lower amount of stake provided on deposits, because of the increase in taxes, there is a chance that a black market gaming ecosystem may also start thriving which would operate illegally without any legal or societal regulation.

One will have to wait and watch to see how the industry reacts to the policy change within the policy check period of six months imposed by the GST Council. Given that the industry is already up in arms against the new taxation regime, it is hoped that the policymakers take a balanced and holistic view in future at the time of review, for the economic benefit of the country.

This article was originally published in Legal Era on 23 February 2024 Co-written by: Rahul Yadav, Counsel; Mansie Jain, Associate. Click here for original article

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