India’s decision to increase GST on gaming companies has set the proverbial cat among the pigeons.
However, not many have noticed how actual gambling businesses have gone scot-free, as they will save tax that would significantly increase their earnings following the amendment to the GST laws.
How bizarre is that?
The amended law has ended up lowering taxes significantly for the hardcore betting and gambling industry. And the skilled gaming industry, perfectly legal as per the Indian courts, has been penalised. And the entire cabinet is silent about it.
It may be recalled that prior to the amendment, the “betting and gambling” industry was subjected to a 28 percent GST on the “full face value” of bets, which now stands reduced to 28 percent on deposits.
Now, the homegrown and legal skilled gaming platforms have been saddled with a GST increase of 400-500 percent, and the illegal offshore and Indian pure gambling businesses (which ought to be banned) are rejoicing, given the windfall decrease in their GST obligation.
The move, purely from a policy perspective, is very perplexing.
The ill effects of the new amendment can already be seen with several skill gaming platforms shutting shop and others undertaking massive layoffs.
Unfortunately, several senior finance ministry and GST officials have been saying that the law is merely “clarificatory” and this position brought about by the amendment was always the law.
If this is accepted, then the pure gambling industry would have even more cause to celebrate, it would essentially mean that even those in that industry who adhered to the law, have actually overpaid!
To understand the issues involved more clearly, one may take a few steps back and focus on the evolution of the law in this regard.
Games of Skill vs Games of Chance
The Supreme Court, starting from 1957, has emphasised the distinction between “games of skill” (businesses that are protected by article 19(1)(g)) and “games of chance” (which is not a constitutionally protected right; but, could be permitted as a ‘privilege’ on the basis of a license by the State).
This distinction had so far, from a public policy perspective, been carried forth in the realm of taxation too.
Games of chance played with monetary stakes were classified as betting and gambling and until the introduction of GST, the power to collect taxes on the same vested with the State governments.
The constitutional amendment to introduce GST brought in the power to tax “betting and gambling” under GST. However, the distinction remained intact in as much as for “betting and gambling”, that is, a 28 percent GST was prescribed with a special valuation provision to levy this 28 percent GST on the entire face value of all bets placed.
The online skilled gaming industry, on the other hand, relies upon the aforesaid distinction between games of skill and chance. and given the fact that they were essentially intermediaries like e-commerce platforms, paid 18 percent GST on the platform fee (i.e. their revenue) being earned by them.
In 2022, the GST department sought to invoke the aforesaid special valuation provision for betting and gambling (of 28 percent) against online skilled gaming platforms. In other words, the attempt by the GST department was to treat online skilled gaming platforms at par with “betting and gambling”.
The first and most prominent such attempt was made against Gameskraft Technologies Private Limited by way of Rs. 21,000 crores ($2.6 billion) GST along with interest and penalty additionally – this was the biggest tax notice ever issued in India. Demands were also sent to other companies such as MyTeam11 and Probo.
In a landmark judgment, the Karnataka High Court quashed and set aside the Gameskraft GST notice in May 2023.
It also quashed the Rs 21,000 Crore GST demand after reviewing the legal position at length and clarified that “games of skill” (like Rummy), even if played with money stakes, do not constitute betting and gambling as understood under Indian laws and hence cannot be taxed in the same manner as gambling.
Action against MyTeam 11 was also stayed by the Rajasthan High Court, which went on to describe the GST department's actions of issuing the demand as an abuse of the process of law.
In the amendments recommended in GST law post the 50th and 51st GST Council, it is clear that there is an attempt to overcome the Karnataka High Court judgment – for the first time, the words Online Gaming and Online Money Gaming are being introduced in GST law – since the earlier attempt to tax online gaming as ‘betting and gambling’ failed.
Significantly, the amendments treat all online gaming platforms in the same manner without making a distinction between ‘games of skill’ and ‘games of chance’. This is a deviation not only from 60 years of jurisprudence but also from the ‘skill vs. chance’ framework as envisaged under the recent guidelines from the Union Ministry of Electronics & Information Technology for regulating online games too.
But the Crisis Lies Elsewhere
The amended law actually ends up lowering taxes significantly for the pure “betting and gambling” industry while penalising the legal skilled gaming industry!
It may be recalled that prior to the amendment, the “betting and gambling” industry was subjected to a 28 percent GST on the “full face value” of bets (in industry parlance CEA - Contest Entry Amount), which now stands reduced to 28 percent on deposits!
Further, the GST authorities have appealed the Karnataka High Court decision before the Supreme Court, and senior finance ministry functionaries have made repeated statements to the media about their intent to go after online gaming platforms for the past period. The Supreme Court has recently stayed the Karnataka High Court order and is expected to hear this appeal starting from 10th October 2023.
This appeal is even more baffling.
In the Karnataka matter, the demand was based on the erstwhile law, i.e. 28 percent GST was sought to be levied on the CEA by equating skilled gaming with gambling. Now, in the unlikely event that the GST department prevails in the Supreme Court, it will make it possible for the GST department to go after all the gaming companies for past taxes, with claims based on CEA.
What Happens to the New Law?
The new law is based on 28 percent on deposits while the erstwhile one was 28 percent on full face value of bets/CEA. The two concepts cannot exist together.
Further, if one were to accept the GST officials' version of the new law being merely clarificatory, then the issue becomes even murkier! Quite clearly then the demand on Gameskraft by this logic itself, wasn’t proper. Also, how could both deposits and CEA have co-existed together?
The other effect of applying the new amendment retrospectively will be to provide a further boost to the pure gambling industry. Imagine a situation where a gambling operator was facing demands from the GST authorities for evading GST prior to the new amendments – the demand, rightly, would have been based on a 28 percent levy on CEA. Now, if the new amendment is sought to be applied retrospectively, then lo and behold, the GST demand on such pure gambling operators will fall drastically.
Can that ever be the intent?
There’s more to the gaming sector. A team of electrical engineers from the Indian Institute of Technology, New Delhi, researched and wrote a detailed paper on games of skill and chance. The paper, crafted by Taranjit Kaur, Manas Pati Tripathi, Ashirbad Samantaray, and Tapan K Gandhi investigated the degree of cognitive skills required for success in online versions of the popular card game rummy and poker. The study focused on analysing the impact of experience and learnable skills on success in online card games.
The study said the mean of the involved skill variables is not zero as the user plays a greater number of games, thereby strengthening the assumption that long-term success in online card games is attributed to skill and not chance: “There is no difference in online and offline versions of card games (rummy and poker) from the perspective of requirement of skills. There is a preponderance of skills to succeed in online card gaming.”
It further said in the ever-evolving world of digital entertainment, online games have emerged as a captivating force that transcends borders and brings people together in virtual realms. “With the rise of internet connectivity and technological advancements, online gaming experiences have become vivid in nature. Online card games like poker and rummy have established themselves as timeless classics that continue to captivate players of all skill levels. The effect of this online gaming on the sociological and psychological paradigm of people has been studied well.”
It will be fascinating to see how the story unfolds here: given the new GST law, will India actually welcome the pure gambling industry or is this a mistake and will be corrected by the Finance Ministry by maintaining the distinction between games of skill and chance and a better tax road map will be charted for the skill gaming industry.
(Shantanu Guha Ray is the Asia Editor of Central European News, UK and Zenger News, US. He is also a columnist with Moneycontrol. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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