The 50th GST Council meeting witnessed intense discussions surrounding the taxation of casinos, horse racing, and online gaming. The GoM’s recommendation for a uniform 28% tax rate on all three activities, along with the proposal to include online gaming and horse racing as taxable actionable claims in Schedule III, has raised concerns among stakeholders in the gaming industry.
50th Council Effect on the Game Industry:
A Group of Ministers (GoM) was constituted to look into the issues related to taxation on casinos, horse racing and online gaming. The GoM submitted its first report in June 2022 and it was placed before the GST Council in its 47th GST Council meeting wherein, it was decided that the GoM may relook into all the issues once again. The GoM submitted its report and it was placed before the 50th GST Council meeting.
The GoM, in its second report, has recommended that since no consensus could be reached on whether the activities of online gaming, horse racing, and casinos should be taxed at 28% on the full-face value of bets placed or on the GGR, the GST Council may decide. The GST Council has deliberated on the issues
and has recommended the following:
- All three activities, namely casinos, horse racing, and online gaming, should be taxed at a uniform rate of 28%.
- Suitable amendments to the law should be made to include online gaming and horse racing in Schedule III as taxable actionable claims.
- Tax will be applicable based on the face value of chips purchased in the case of casinos, the full value of bets placed with bookmakers/totalisators in the case of horse racing, and the full value of bets placed in the case of online gaming.
Amendment in Schedule III:
The proposed amendment in Schedule III aims to clarify the taxation treatment of online gaming, casinos and horse racing as an actionable claim subject to a 28 percent tax rate.
Now SCHEDULE III ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES will be amended as follows retrospectively:
……….
- Actionable claims, other than lottery, betting, gambling, and casinos, horse racing and online gaming.
Decision of Karnataka High Court related to GAME INDUSTRY:
“In a game of rummy, certain amount of skill is required because the fall of the cards has to be memorized and the building up of rummy requires considerable skill in holding and discarding cards. Therefore, a game of rummy isa game of skill as held in Satyanarayana supra.”
- There is a distinction between games of skill and games of chance. Games like rummy are considered games of skill, whether played online or offline, with or without stakes.
- Wagering contracts (risk against someone else’s on the basis of the outcome of an unpredictable event) are recognized as part of business under Section 2(17) of the CGST Act, but this does not mean that lottery, betting, and gambling are the same as games of skill.
- The terms “lottery, betting, and gambling” in Entry 6 of Schedule III of the CGST Act should be interpreted based on court decisions, which do not include games of skill.
- Entry 6 in Schedule III of the CGST Act excludes actionable claims (such as games of skill) from the scope of supply, while games of chance like lottery, betting, and gambling are taxable.
- Taxation of games of skill falls outside the scope of “supply” according to Section 7(2) of the CGST Act read with Schedule III.
- A game of chance played with stakes is considered gambling. A game of skill, with or without stakes, is not gambling. A game that involves a mix of chance and skill is gambling if chance predominates, while it is not gambling if skill predominates.
- Rummy is predominantly a game of skill, not chance, whether played with stakes or without. There is no distinction between physical and online rummy, as both are predominantly games of skill.
- Online games other than rummy that are predominantly games of skill are also not considered gambling.
- The terms “Betting” and “Gambling” used in Entry 6 of Schedule III of the CGST Act are not applicable to online rummy or other online games that are predominantly games of skill.
- Online rummy and other online games played on the petitioners’ platforms are not taxable as betting or gambling under the CGST Act and Rules. The issued show cause notice to the petitioners is illegal, arbitrary, and without jurisdiction or authority of law, and it should be quashed.
- KARNATAKA High Court’s Judgment: Skill-Based Games Get Green Light – RMPS (rmpsco.com)
Further Meeting on 2nd August:
The GST Council has planned an unscheduled meeting on August 2 to address the concerns surrounding the tax treatment of online gaming. The meeting will be conducted via videoconferencing and will primarily focus on clarifying the legal amendments required for the 28 percent tax on real-money games.
The agenda will be limited, primarily centering on the taxation treatment of online gaming, particularly with respect to Schedule III of the Central GST Act, which defines how lottery, betting, and gambling are taxed under GST.
Conclusion:
The GST Council’s decision to impose a 28 percent tax on the full value of money paid by users to play online games has raised concerns within the gaming industry. The previous tax rate paid by online gaming platforms was 18 percent on the platform fees (Gross Gaming Revenue), not the full transaction value (Contest Entry Amount).
Furthermore, the retrospective effect of the law changes adds to the uncertainty and challenges faced by the gaming industry. Retrospective effect means that the tax changes apply to transactions that occurred in the past, even before the new law was enacted. This aspect raises issues of fairness and practicality, as businesses may have conducted operations and financial planning under the previous tax regime, only to face higher tax liabilities retroactively. Such a retrospective application of tax laws can lead to financial hardships and operational difficulties for companies in the gaming sector.
The decisions taken during the 50th GST Council meeting are likely to have a substantial impact on the gaming sector. With a uniform tax rate of 28% applied to casinos, horse racing, and online gaming, and the inclusion of these activities in Schedule III, significant changes are anticipated in how these industries are taxed.
This Article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update etc. if any.
Published on: July 28, 2023