GST Council recommends uniform levy of 28% GST on online gaming: What's next?

The regulatory overhaul of the online gaming sector does not seem to end. Soon after the recent amendment to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules discussed here, the GST Council issued further recommendations to regulate the tax implications upon online gaming platforms and their users.

Recommendation made by the GST Council

Presently, online gaming companies are subject to a levy of Goods and Services Tax (GST) at 18% on the gross gaming revenue (GGR), which is the total stake value/distributed winnings or the platform fee for offering games of skill. However, in the case of games of chance, online gaming companies are subject to a GST levy of 28% on the total bet value. Whereas the users of online gaming platforms are not subject to any additional levy of GST on the bets placed by them, other than the platform fee paid to the online gaming platform and TDS deduction of 30% on winnings.

On July 11, 2023, at its 50^th meeting, the GST Council recommended a levy of 28% GST uniformly on the total game value for online gaming, horse racing and casinos, irrespective of whether they are games of chance or games of skill. This news is understandably distressing for gaming companies. If the said recommendation of the GST Council is brought into effect, the tax incidence on online gaming will be applicable on the full value of the bets placed, being, on a ‘gross revenue’ basis i.e., on the total stake value and not on the GGR.

Moreover, the recommendation made by the GST Council, if implemented, will require an amendment to Schedule III of the Central Goods and Service Tax Act, 2017 (CGST Act) to include online games within the purview of ‘taxable actionable claims’.

The recommendation made by the GST Council is also being seen as yet another attempt by the Central Government to treat ‘games of skill’ and ‘games of chance’ uniformly. Such intent of the Central Government has already been witnessed recently when the recent amendment to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2023 was enacted on April 6, 2023, which also did not distinguish between 'games of skill’ and 'games of chance’ and treated them uniformly in terms of compliance with the said rules, terming them as online gaming intermediaries.

Moreover, the recommendation of the GST Council would vitiate the rationale laid down by the recent judgment of the Karnataka High Court in Gameskraft Technologies Private Limited v. Director General of Goods and Service Tax Intelligence and Ors, wherein the High Court had quashed a show cause notice issued by the Directorate General of Goods and Service Tax Intelligence to the tune of approximately ₹21,000 crore. Vide the aforesaid judgment, the High Court had distinguished between ‘game of skill’ and ‘game of chance’ and had ruled that since the game of online rummy is a ‘game of skill’, it falls outside the scope of the term ‘supply’ and is thereby not taxable in view of Section 7(2) of the CGST Act. It was further held that such a ‘game of skill’ is distinct from the terms ‘betting’ and ‘gambling’ appearing in Entry 6 of Schedule III of the CGST Act.

This would also render otiose another key matter which has been pending since 2020 - a review petition currently pending before the Bombay High Court in State of Maharashtra and Ors v. Gurdeep Singh Sachar, whereby it was inter alia alleged that the gaming activity/games of chance involving stakes fell under the purview of ‘gambling’ and the proceeds generated therein, which includes the prize money, is defined as ‘taxable supply’ and therefore, taxable under the CGST Act at 28% GST.

Therefore, the recommendation made by the GST Council would effectively nullify the aforesaid matters by treating online games of skill and chance as the same.

Possible impact

As per the India Brand Equity Foundation, the Indian gaming industry has secured an influx of $2.8 billion from both domestic and international investors in the past five years and has amassed a turnover of ₹13,500 crore in 2022 alone. The aforesaid recommendation of the GST Council has invited concerns from most stakeholders and imposing increased taxes on the gaming industry would have detrimental consequences, which may potentially lead to its slow death. While it is important to ensure fair taxation, excessively burdening the gaming sector with additional financial obligations can stifle its growth and innovation. The gaming industry has been a significant contributor to economic development, technological advancements and job creation in the past few years. However, the imposition of higher taxes could hinder its ability to sustain this momentum.

One of the potential outcomes of increased taxes will lead to the rise of unlicensed operators in an attempt to evade tax liability. When faced with exorbitant tax burdens, some companies may resort to using unlicensed platforms to minimize their financial obligations. This not only compromises the integrity of the industry but also creates an uneven playing field, where licensed operators are burdened with higher costs and regulations while unlicensed entities enjoy unfair advantages.

Furthermore, higher taxes can discourage investment in the gaming industry. Investors and entrepreneurs are driven by profitability, and if the tax burden becomes too onerous, they may be deterred from allocating their resources to this sector. This lack of investment can lead to a decline in the development of new games, innovative technologies and job opportunities within the gaming industry.

Policymakers must strike a balance between fair taxation and industry sustainability. Instead of burdening the gaming industry with excessive taxes, governments should consider implementing measures that encourage compliance, support legitimate operators and foster growth. This could involve providing incentives for licensed operators, streamlining tax regulations and engaging in open dialogues with industry stakeholders to ensure a fair and mutually beneficial taxation framework.

In conclusion, policymakers must recognize the potential consequences of increased taxes on the gaming industry. By taking a measured approach that considers the long-term health and vitality of the sector, governments can foster a thriving gaming industry while ensuring fair taxation practices.

Dr Abhimanyu Chopra is a Partner, Aman Chaudhary is a Senior Associate and Kushagra Jain is an Associate at AZB & Partners.