Since its implementation, the levy of the Goods and Services Tax (GST) on online games has been a point of contention due to potential revenue leakage. The first question is to determine whether online game is actually a game of skill or a kind of gambling, whilst the second issue concerns the value of services and, as a result, the amount of GST that is required to be paid. The conundrum is exacerbated by the range of games and the possible income structures that are available. The GST Council had set up a group of ministers (“GOM”) to address the corresponding disputes and uncertainties. According to the publicly available information, a decision on the rate applicable to online games and how to value the supplies is scheduled to be published soon. The Government aims to raise the applicable rate of GST on such online games to 28 % to discourage gambling-style operandi while leaving the GST rate on learning games unchanged.
Background
The most common models used in online games are rake fee model (in which the gaming platform charges a fee for facilitating the game) or the freemium model (in which the game is free but activities such as improving performance, prolonging the player’s life, skipping levels, and so on are charged). The entire dilemma revolves around the GST legislation’s uneven tax classification and its treatment of games of skill with that of games of chance. Online games are subject to GST at a rate of 18 %, whereas gambling is subject to a charge of 28 %. Surprisingly, even after five years of GST adoption, gambling is yet to be defined and no explanation has been offered in this regard. Furthermore, as of January 23, 2018, the value of supply of actionable claims in the nature of lottery, betting, and gambling, etc. has been amended to provide that such value shall be 100 % of the face value of the bet or the amount paid into the totalizator. The concern has been around the absence of defined valuation rules and the confusion about the levy of GST on the entire value in connection to the rake charge. The High Court of Bombay (“Bom HC”) dealt with a case concerning an online game service provider which was alleged to be hosting illicit gambling/betting/wagering under the guise of Fantasy Sports and was evading payment of GST.[1]
Bombay HC Decision
In its examination of the game structure and method of play on the gaming platform, the Bom HC found that participants choose virtual teams based on past knowledge, awareness of player performances, playing arena conditions, etc. The game assigns pre-programmed virtual points to teams/players based on the performance of real-life sport personalities in real sporting events. But, an online gamer’s victory or loss is not always contingent on the win or loss of teams at the real sporting event. Applying this assessment, the court concluded that such games are based on skill predominantly and hence, attracted GST at the rate of 18%.
As regards the valuation, the court observed that the amount of money pooled by the participants was distributed to the winner based on the result of the game. Hence, they are in the nature of ‘actionable claims’. Accordingly, it held that the pooled amount is a consideration for an activity not exigible to GST[2]. Thus, the HC concluded that GST is payable on the platform fee / services alone.
Similarly, Rajasthan High Court in the another matter held that the online fantasy games are games of mere skill. The HC substantiated the decision by observing that the online fantasy games are duly regulated by Federation of Indian Fantasy Sports (“FIFS”) and its charter provides safeguards in relation to the participation of minors, prohibition of advertising suggesting betting/ gambling as well as penalties for any violation of such guidelines. Therefore, platforms for online fantasy games do not operate in a regulatory vacuum. However, the HC expressed no opinion on the issue of valuation under GST and left it for the GST authorities to consider, in the light of its judgment, the nature of online fantasy games as not being betting/ gambling.
Other Online Games
Interestingly, the Bombay and Rajasthan HC decision made it clear that online fantasy sports should be treated as a game of skills, but the law does not provide a specific definition of a game of skills, as it is hosted on the internet and other public forum. Even, the existing GST framework does not specifically deal with games of skills. Hence, there continues to be a risk of the tax authorities disregarding the distinguishing features between games of skill and games of chance. It is an important aspect because if such games are held to be games of chance, the GST could be payable at 28% on the 100% value including the pooled amount collected by the organisors. While guidance may be drawn from the earlier decision of the Supreme Court of India (SC) in the case of State of Andhra Pradesh v. K. Satyanarayana[3], and Dr. K.R. Lakshmanan v. State of Tamil Nadu[4], wherein the Hon’ble SC had held that all games contain a coincidence element, but a skill game is a game in which the skill element predominates. However, the situation complicates as each state has a different definition of gambling. For example, games like poker are not consistently dealt with in different states. In Nagaland, it is regarded as a game of skill but in Gujarat, it is construed as a game of chance[5]. Further, with the involvement of real money, the situation gets complicated even further. Games hosted on the web may be processed differently depending on the state. Thus, it is important to review the mechanics and methodologies that is deployed to determine whether a game hosted on an online gaming site is a game based on skill or not as per the definition prevalent in the state it is being played. With respect to the value of supply, it can be presumed that GST would be payable on both the charge received by the online platform and the pooled money in relation to games of chance by relying on Rule 31A of the CGST Rules. However, if it is construed as a game of skill, most of the gaming platforms have taken the position that GST is payable only on the platform fee/service, i.e. the consideration collected for the sale of online gaming services and not on the pooled sum, based on the decision of the Bom HC discussed above in context of online fantasy sports. However, the aforementioned position has yet not been formally approved by CBIC or the GST Authority. It is also relevant to note that HC has provided its view in a criminal public interest lawsuit where the issue was whether the fantasy sport can be equated with gambling or not. As a result, the fate of how GST should be calculated in respect to games of skill is currently up in the air.
Conclusion
It is expected that the GOM agrees with the valuation methodology utilised by most of the platforms, i.e. GST should be applied to the amount collected by the platform in exchange for its services such as admission fees, subscription fees, in-game revenue and not on the pooled money. This would also be in line with mechanism followed in other countries like the United State of America[6] and organisations like the European Union. Alternately, the Government may consider providing credit of the winning amount (in effect levying GST only on money retained by gaming platform) or provide for a significantly reduced rate of 1%, if computed on the whole amount. Nevertheless, should any change comes along there is a high potential that GST Authorities would claim them to be clarificatory in nature, even though prospective, and knock at the doors of all gaming platforms. We would sincerely hope that the GOM comes up with the valuation mechanism that is explicitly defined to avoid uncertainties and potential litigations resulting to spurious tax claims. Any ambiguity or risk of GST investigation has a negative influence on business strategy, operations, and new entrants into the industry. As majority of online gaming companies charge a platform fee below 20%, any attempt to collect GST on the total value or at a higher rate of 28% could essentially render the entire business model unsustainable and may coerce such entities to shut their operations.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
srpatnaik@cyrilshroff.com
[1] Criminal Public Interest Litigation No. 22/ 2019 dated April 30, 2019 (Bombay High Court) Upheld by Supreme Court in Special Leave Petition (Criminal) Diary No. 43346/2019 dated December 13, 2019..
[2] Schedule III to the CGST Act – An ‘actionable claim’ other than lottery, betting and gambling was neither a ‘supply of goods’ nor a ‘supply or services’
[3] State of Andhra Pradesh v. K. Satyanarayana AIR 1968 SC 825
[4] Dr. K.R. Lakshmanan v. State of Tamil Nadu AIR 1996 SC 1153
[5] Special Civil Application No. 6903/2017 dated December 04, 2017 (Gujarat High Court).
[6] Nevada
