The American sociologist Arthur Stinchcombe made the pertinent point that new business organizations are burdened with the liability of newness and Government support through considerate policy and support is essential to nurture them so that they can overcome this liability and take off on the growth curve. The intention of our Honorable Prime Minister is to make India a global innovation and gaming hub and in line with this vision a simpler tax structure with an easier compliance should be made available to the sunrise industry of online gaming.
In this spirit, the GST Council in its 50th meeting held on 11th July 2023 decided the road ahead and made t recommendations for the online gaming industry, clearing the uncertainty clouding over two years now. One, that online gaming should be taxed at the rate of 28%. , that the tax will be applicable on the full value of the bets placed. The clarity provided by the Council is a welcome development for all the stakeholders involved. It is important to note that the online gaming industry was previously paying 18% GST only on the platform fee (Gross Gaming Revenue) which was the commission charged for using the gaming platform by the gamer.
Let us examine each of the recommendations already made and the conclusions that follow from them. The first recommendation is that the rate of tax on the online gaming is to be at 28% on the full value of the bets placed. The issue of interpretation as to whether the “full value of the bets placed” refers to the entry deposit where the full value of moneyfor all subsequent bets or it refers to the full value of the bets for each game separately (contest entry amount) when such games are played needs to be resolved. The GST Council is again meeting on 2nd August where it is expected to resolve this interpretation issue thereby providing complete certainty to the levy of 28%.
An example shall bring more clarity to this discussion. If two gamers are depositing 100 rupees each into their wallets at the time of entry, then the simplest way to tax it is to levy tax on this full value i.e., 28% on full value of all the subsequent bets that the two of them can possibly place. The compliance cost is minimal and a simpler tax structure would be a welcome move. If on the other hand, tax is to be imposed every time a bet is placed from their respective wallets then the fear of the same amount getting taxed repeatedly, effectively increasing the taxation to beyond 28% exists.
The recommendation is that online gaming shall be included as a taxable actionable claim. Under GST law, an actionable claim is explicitly included in the definition of goods. Consequently, online gaming shall in its entirety be considered a good and the platform becomes a supplier of goods under GST.
Given the law has been amended to include online gaming along with actionable claims, parity with casinos in this regard deserves consideration too. On this point it is necessary to appreciate that the Group of Ministers (GoM) in its report submitted in the 47th GST Council Meeting deliberated on repeat taxation on casinos and recorded that “taxing each round, once tax is collected at entry on the purchase of chips, is neither feasible nor desirable. This will make the casinos unviable. It was also felt that the right to play with the winnings of the previous game was inherent in the rights acquired by the players against the price paid for the chips / tokens purchased from the casinos”
The same line of reasoning is applicable to the online gaming industry also. Once an entry amount is deposited into the wallet and suffers 28% GST, the player stakes his claim not only to the right to place bets on different games through the money in the wallet but also the right to use the winnings that accrue into the wallet to place subsequent bets. Since the right to use winnings is inherent when the entry value is deposited into the wallet, it is appropriate to tax the full value of the entry deposit.
The 28% on the full value of the entry deposit will avoid undue and unjustified discrimination of the online gaming by taxing it higher compared to casinos and will avoid repeat taxation of the same rupee on which GST has been levied already. This shall also promote transparency in the system with easy verifiability of the entire transactions that take place through RBI approved payment channels.
The upcoming GST council meeting, it is positively expected, shall resolve this conundrum on the GST the potential of high employment and investment that the industry is expected to churn in the coming years. The decision of the council shall therefore resonate gaming industry and will be keenly watched by the entire start-up ecosystem of India.
(This is an opinion piece by Dr. John Joseph, who served in the IRS for more than three decades and is a strategic advisor for Delhi based thinktank, DeepStrat.)