GST On Online Gaming: the Golden Goose Egg? This industry undoubtedly requires pro-active, progressive and equitable tax measures from the government

The online gaming industry is currently growing at an accelerated speed with an ever-expanding net of over 400 million online gamers and more than 400-plus startup companies hovering on building their businesses around this phenomenon. As per a FICCI report released in 2020, online gaming sector made INR 6,500 crore in 2019 and is expected to reach INR 18,700 crore by 2022 contributing massively to employment, growth to ancillary sector, bringing in fresh investments and Indian economy. Hence, this industry undoubtedly requires pro-active, progressive and equitable tax measures from the government.

The 48^th GST Council Meeting is scheduled to meet on December 17, 2022 and is likely to review the report submitted by the Group of Ministers (GoM) on casino, race course and online gaming. The GST Council is likely to decide the rate of GST which is expected to be 28 per cent as recommended by the GoM irrespective of the fact that whether the same is a 'game of skill' or a 'game of chance'. Presently, online gaming attracts different GST rates by virtue of the Supreme Court's decision in the case of K.R. Lakshmanan wherein it has been held that horse racing is a 'game of skill' as success arises out of user's exercise of superior knowledge, judgment and attention and hence does not qualify as a 'game of chance'. This decision has been relied by the Punjab & Haryana High Court in the case of Varun Gumber wherein it has been held that online games are games of mere skill and not game of chance. With these rulings, taxability of online gaming seemed to be settled. However, keeping in view that the GST Council would be coming up with one GST rate on the online gaming, it appears that the GST Council would be over-riding the Apex Court decision.

The recommendation of the GoM which effectively dilutes the lines between game of skill with game of chance, and may lead to a legislature anarchy, unless taken care by a legislative amendment in the GST laws. Further, the recommended rate of 28 per cent is seen as catastrophic for the online gaming industry which has more than 800 gaming companies in India including approximately half being start-ups, which may find very hard to survive a 50-53 per cent rise in tax. Globally, the gaming industry pays tax anywhere between 10 per cent and 20 per cent thus, the ideal situation for the industry would be to fall in this bracket itself.

Another issue which is being faced by the online gaming companies is the value on which GST is applicable, i.e., whether on the entire amount collected from the participant customer/online gamer or the platform fee. The High Court of Bombay in the case of Gurdeep Singh Sachar has held that GST is to be charged on amount received towards platform fee and not on the entire pool amount received for a particular contest as the remaining amount other than platform fee is treated as an actionable claim. In terms of Schedule III of the CGST Act, actionable claims, other than lottery, betting and gambling is an activity or transaction which shall neither be treated as a supply of goods or a supply of services, hence actionable claim is not chargeable to GST. Accordingly, online gaming companies have been discharging GST on the platform fee collected by them, and not on the entire money collected from the participant customer/online gamer. It seems that the GST Council is likely to recommend in this meeting that GST should be applicable on entire amount collected by the online gaming company irrespective of the fact that out of the total amount, some amount (other than platform fee) is returned to the participant customer/online gamer as prize money. Accordingly, GST Council may suggest suitable amendment to be introduced in Schedule III of the CGST Act and provide the manner of valuation of online games under Rule 31A of the CGST Rules.

If the suggested changes are accepted by the GST Council, from the gamer's side also, the cost to participate in the game will go up by more than 250 per cent and may force many of the gamers to limit their participation as their cost of playing will go up. This will result in depletion of the online gaming industry's user base. In this case, either the gaming industry has to reduce the platform fee charged or the prize pool offered. If they reduce the platform fee charged, they will take a hit on revenue and if they reduce the prize pool, they might face a loss of user base. At the same time, to recover their loss of revenue, the online gaming industry may look into the option of increase in platform fee, however on the flip side it may lead to depletion in number of participant customer/online gamers. This situation appears as a double-edged sword for the online gaming companies.

So overall the industry has no positive signs if the recommendations are accepted by the GST Council. This sector, which contributed INR 1,500-2,000 crore in 2020 to the government exchequer and is expected to reach INR 3,500-5,000 crore by 2025, is considered as sunrise sector by the government and therefore requires serious consideration towards its stability keeping in view the international standards.