The Goods and Services Tax Council (GST Council) after its 50^th meeting dated July 11, 2023, recommended the imposition of a flat 28% Goods and Services Tax (GST) on the total face value of the bet in casinos, online games and horse races. This flat rate would be imposed on all forms of online games, regardless of their classification as a ‘game of skill’ or a ‘game of chance’. In addition to the increased rate of taxation, the GST Council further recommended shifting from calculating GST on the ‘gross gaming revenue’ (the fee or commission collected by online gaming platforms) to the complete amount deposited by the user. Therefore, the effective rate of taxation on the deposits made by the users would increase exponentially. 

This recommendation of the GST Council faced significant backlash from the gaming industry with more than 100 online gaming platforms and online gaming federations writing a letter to the Ministry of Electronics and Information Technology highlighting the detrimental impact on the online gaming ecosystem in India, especially driving smaller start-ups in the space, out of the market.

In this regard, the GST Council called for another meeting on August 02, 2023, to review the recommendations and establish a definitive timeline for the implementation of the revised GST regime for the online gaming, casino and horse racing industries.

The primary agenda of the 51^st meeting of the GST Council was to review its recommendation during its 50^th meeting to levy GST at a rate of 28% on the total amount deposited on online gaming platforms, casinos, and horse races and to evaluate the language of the amendments to be introduced to the applicable legislations.  

In the press conference conducted pursuant to this meeting, the Union Finance Minister clarified that although the objections raised by members representing the States of Goa, Sikkim and the Union Territory of Delhi, have been reviewed, the decision to amend the law and impose the increased rate of GST will be implemented. 

The Finance Minister confirmed that they expect these amendments to be implement from October 01, 2023 onwards. The Finance Minister further noted that representatives of several states – Chhattisgarh, Gujarat, West Bengal, Karnataka, Bihar, Uttar Pradesh, and Himachal Pradesh have indicated that they are ready to introduce similar amendments before their respective State Legislatures by the October 1^st deadline. However, the GST Council expects to revisit this matter and review it 6 months from the date of its implementation. 

This decision, therefore, marks a stark shift in the approach to taxing online gaming as the total principal amount on which the tax is levied has been increased from the ‘gross gaming revenue’ (the platform fee levied) to the entire amount deposited by the user. It further deals a huge blow to the industry participants who believed that the GST Council’s review would offer them some respite in terms of tax liability.

The recommendations of the GST Council were tabled before the Parliament by the Finance Minister on August 11, 2023, in the form of the Goods and Services Tax (Amendment) Bill, 2023. The amendment was passed by both, the Lok Sabha and Rajya Sabha. The amendment is expected to come into force on October 1^st.

A looming issue that continues to be at large is the period of applicability of these amendments – does this new GST regime apply retrospectively? While clarity on this aspect was specifically requested at the press conference conducted post the 51^st meeting of the GST Council, the responses received appeared to lean in the direction that the amendments are meant to be viewed as clarifications. Further, it is reported that the Central Board of Direct Taxes is looking to impose the increased rates of taxation on online gaming companies from 2017 – when the GST regime originally came into force. This approach appears to be in contrast with the recent Karnataka High Court judgment in the Gameskraft case – which held that the GST liability for users of platforms offering games of skill would be 18% (albeit on the ‘gross gaming revenue’). These developments may be additionally discouraging for the stakeholders of the industry.

Several online gaming companies have undertaken mass layoffs in an attempt to cut costs to weather the downturn that the online gaming industry is set to face as a result of the revisions made to the GST regime. Industry participants, however, remain hopeful that the GST Council’s review of these amendments after six months from the date of implementation will bring them some reprieve, and that the Government may adopt a more lenient approach to taxing online gaming. However, with the General Elections around the corner, it may be the case that such review will have to wait beyond such six-month period.

Christopher Rao is a Partner and Yash Chadha is an Associate at Krishnamurthy & Co.