The panel of ministers, which met last week, also decided that the tax will be levied on the full ‘face value’ or ‘bet amount’ and not the full value of the transaction. The total value of the transaction includes the prize money or the net commissions (revenues) that accrue to the gaming companies. These recommendations will be sent to the Goods and Services Tax (GST) Board for approval.
The online gambling industry that operates skill-based games like esports, rummy, poker, chess and fantasy games has been pushing for the GST to be capped at less than 18%.
They had backed the claim, saying a move to the top tax bracket would derail the $2.2 billion industry which has 400 players and employs about 45,000 people.
Currently, the rate of GST applicable to 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 online gaming platforms for each game.
The industry believes that a high GST rate will render the entire online gambling industry unviable.
Are online games even legal?
“One of the most crucial parameters in determining the legality of online fantasy games is whether such a game is primarily a ‘game of skill’ or a ‘game of chance.’ online, there have been numerous court rulings case law on determining the legality of these online games Generally speaking, the position of the law with regard to fantasy games according to the decisions of several high courts, including including Honorable High Court of Punjab and Haryana, Honorable High Court of Bombay, Hon’ble High Court of Rajasthan as well as Hon’ble Supreme Court of India, they can be said to be settled in favor of the idea that fantasy games are ‘games of skill’ and do not fall within the realm of gambling and/or betting,” said Amay Jain, Senior Partner, Victoriam Legalis – Lawyers and Solicitors.
Nevertheless, said position is subject to change in the laws, interpretation and application of the law by the courts in various cases that arise. For example, earlier in October 2021, the state government of Karnataka amended the Karnataka Police Act 1963 to make fantasy gambling a non-bailable offence. However, later, the Karnataka High Court struck down this amendment as “unconstitutional” and ruled that online fantasy games should be excluded from the scope of activities declared as a non-bailable offense by the state government. .
“Currently, the legal regime for online gambling is a confusing matrix of different state laws, central laws and judgments of various courts that have the force of law. Some of these laws predate the era of online gambling It is a welcome move to have a central committee to assess and recommend a modern regulatory regime that is uniform and attempts to keep up with developments in the sector One of the key elements would be to have a clear and well-defined distinction defined between games of skill and games of chance The same treatment can be given to online betting on horse racing as selecting a fantasy cricket team and winning money based on actual player performance or to Call of Duty or Fortnite online play where there is no element of luck,” said Shoubhik Dasgupta, Partner, Pioneer Legal.
In the absence of a unified gambling code, different courts have taken differing views on how to deal with online gambling. With few exceptions, games of skill when played for stakes are excluded from gambling bans in most Indian states. “With the growing interest in this sector, a uniform regulatory regime clarifying aspects related to tax implications etc. seems to be the way forward,” said Rishi Anand, Partner, DSK Legal.
When is indirect tax charged?
International experience in the field of games of skill suggests that the indirect tax is generally levied on the gross income from the games or on the commissions, that is to say the income received by the gaming operators. If the platform offers a game of chance qualified as a bet or a game, the tax is then applied to the entry fee or to the stake.
“With GoM’s proposed convergence of the GST rate to 28% for online games, it will be interesting to see how rating mechanisms would be prescribed for skill-based games. It is expected that, in line with international practice, the value of online gambling should be the gross gambling revenue or commission fee (platform fee) and not the entry amount or stake.This is a critical aspect which must also be considered immediately to clarify the sector.It is feared that charging GST on entry or stake fees would mean that operators would then eventually have to pass the higher burden of GST on to In such a scenario, player earnings could be compressed and could be discouraged. Therefore, this may impact volumes, overall economic value, and may also affect compliance behavior,” said said Hardik Gandhi, Partner, Deloitte Haskins & Sells LLP on online gambling and taxation.
Currently, most online gambling platforms pay 18% of the commission received by online gambling platforms for each game, while those involved in betting or gambling attract 28%. On horse racing, GST is levied at 28% on the total value of bets. Worldwide, online gambling fees are taxed between 15% and 18%.
According to a report by Copenhagen Economics “the tax rate should not exceed 20%. The reason for this is that at higher tax rates, gambling operators as well as consumers will choose not to join the system of licenses”. The report shows how France, which levies an extremely high tax rate on the GGR (about 37% on online poker and 45% on sports betting), achieves a tax income per capita of only 41% of that of the United Kingdom, which levies a 15% tax on GGR.
GST authorities, meanwhile, have issued notices to various industry players, offering to recover the additional GST due to the valuation dispute. However, the Punjab and Haryana High Court recently provided much-needed relief, ordering the GST authorities not to take any enforcement action until clarification is available from the government.
What does the industry think?
A tax increase would not only have a catastrophic impact on the industry, but would also encourage offshore operators who circumvent Indian tax jurisdiction by hosting games in another country, Games24x7 co-CEO Trivikraman Thampy said. “It would be a triple whammy – industry loses, government loses tax revenue and gamers lose because they would be exposed to unscrupulous operators,” he said. An association of skill-based online gambling platforms has made representation to the authorities to keep the Goods and Services Tax (GST) at the current level for the industry which has 400 companies employing around 45,000 people.
According to Thampy, GST is currently charged on platform fees, called gross gaming revenue (GGR), rather than on the total pooled amount for a game. “Optimal taxation for the online gambling industry between 15 and 20%. Our current GST rate of 18% is in line with best practice and reduces the incidence of illegitimate operators,” he said.
Online games of skill are inherently different from games of chance, and the skill game industry is not gambling or a lottery, he added.
What about personal tax?
Lottery and gambling winnings such as poker are subject to tax. India imposes TDS, or withholding tax deductible, on all gambling winnings. Under Section 194B of the Income Tax Act, winnings from lotteries and gambling have a corresponding TDS 30% provided the amount is at least Rs. 10,000 excluding tax. The net rate after transfer is 31.2%, without the benefit of the basic exemption ceiling.
For online poker, the tax is automatically deducted from your winnings. Once you have received payment, you will not have to pay any further taxes. However, if the TDS is not deducted from your gain, you will be required to file an income tax return within 30 days of receiving the amount.
For example, Mr. Pinto earns Rs 2 lakh as annual income and has also earned Rs 30,000 from online gambling. His income is below the basic exemption ceiling. i.e. 2.5 lakhs. But Mr Pinto will still have to pay 31.2% tax on Rs. 30,000 including tax. But after that, no deductions or expenses can be applied to such income.