Classification of Online Gaming: GST Perspective

December 31, 2022/ Astik Dubey/ Tax Law

The Rise of Online Gaming in India

In this era of digitalization, everyone is trying to generate revenue with the help of a digital instruments. One such instrument is fantasy sports, a part of the online gaming industry. It is one of the fastest-growing industries not only in India, but in the world. As per the data provided by Invest-India, with 130 million users, India has the biggest fantasy sports market in the world; online gaming revenue grew by 28% to $1.2 billion in 2021; it could reach $1.9 billion by 2024. The Indian market has already given rise to three gaming unicorns viz. Dream11, Game 24×7, and Mobile Premier League.

The Intersection between Goods and Services Tax and Online Gaming

Over the course of the five-year Goods and Services Tax (“GST”) regime, the GST council reworked and rearranged the tax slabs applicable on a variety of commodities. Currently, one such industry that could experience transformation in terms of applicable GST is online gaming.

With the recent growth of online gaming in India, taxing authorities also want to introduce new rates of GST to Online Gaming. The eight-member ministerial council was established under the Goods and Services Tax to discuss the tax slab on casinos, racetracks, and online gaming. GST Council has formed a Group of Ministers (“GoM”) to examine the issue of valuation of services provided by casinos, race courses and online gaming portals and taxability of certain transactions in a casino, whether any change is required in the legal provisions to adopt any better means of valuation of these services, impact on other similarly placed services like lottery, and so on. According to the GoM, casinos, horse-racing, and online gaming should be taxed at a standard rate of 28%. This  proposed policy makes no distinctions on the basis of whether an online activity constitutes a game of skill, chance, or of both. The GoM has suggested that internet gaming be taxed at a rate of 28% on the total value of consideration, regardless of what name that consideration may go by, including any entry fees paid by players for participation in such games without making a distinction between games of skill or chance.

Some stakeholders, including the players of online games, executives of online gaming platforms and experts of technology law, of the online gaming industry have raised the issue of high rates of tax on the pool money to the GST council. Such stakeholders have also raised the concerns about merging game of skill with mere game of luck. The GoM decided to take the legal opinion on this matter with respect to classification of games. The GoM is not able to decide whether to classify them as game of skill or game of luck or merge them without any classification.

Judicial Perspectives on the Classification of Online Gaming

The classification of online gaming, including fantasy sports, such as Dream11 and Mobile Premier League, has been discussed by several high courts.

The Punjab and Haryana High Court deliberated upon this issue in the case of Varun Gumber v. Union Territory of Chandigarh.  Here, the Petitioner had registered with Dream11 as a user. The Petitioner had transferred Rs. 50,000 to participate in various leagues provided by Dream11. The Petitioner has used all the money that he had deposited to create his team to participate in the tournament. After unfavourable results in the said tournament Petitioner had filed a Writ Petition before the Punjab & Haryana High Court claiming that the Public Gambling Act, 1867 applied to the operations of Dream11s and further claiming that fantasy sports games were not skill-based.

Section 12 of the said Public Gambling Act, 1867 excludes the application of the said Act upon certain games viz.

Act not to apply to certain games – Nothing in the foregoing provisions of this Act contained shall be held to apply to any game of mere skill wherever played.

After considering all the factual details and examining the submission submitted by Dream11, the High Court held that playing of fantasy game by any participant user involving the drafting of a virtual team by a player which would certainly require considerable skill, judgment and discretion. The participant has to assess the relative worth of each athlete/ sportsperson as against all athlete/ sportspersons available for selection and this demonstrates the element of skill.

More than any other factor, the skill element had an impact on Dream11. The operations of the Dream11 was deemed to be protected by Article 19(1)(g) i.e., the right to practise any profession, or to carry on any occupation, trade or business, of the Constitution and therefore exempt from the Public Gambling Act, 1867 .

The decision of the Punjab and Haryana High Court was challenged by the Petitioner. However, the Supreme Court dismissed the Special Leave Petition. Therefore, the decision of the Punjab and Haryana High Court in Varun Gumber emerges as settled law.

The finding rendered by the Punjab and Haryana High Court in Varun Gumber places reliance upon K.R. Lakshmanan v. State of Madras. In K.R. Lakshmanan, the Supreme Court thoroughly examined the term “games of skill” in the context of the sport of horse racing. The Supreme Court determined that the term “mere skill” would refer to a preponderance of skill and chance; thus, even though there may be a small amount of chance, a game would still be considered to be one of “mere talent” if it is primarily a game of skill.

Following the decision rendered in Varun Gumber, a division bench of the Bombay High Court, considered the issue of whether online fantasy sports games like Dream11 qualify as games of skill or are merely games of chance Gurdeep Singh Sachar v. Union of India.   The Bombay High Court ruled that no wagering, gambling, or other forms of wagering are permitted in Dream 11. Thus, it held that Dream11 is a game of skill.

Applicable Rates of GST Levied upon Online Games

Therefore, it can be interpreted that in the view of the court, fantasy sports activities are primarily skill-based games rather than games of chance. Consequently, such games are legal. The GoM may rely on these decisions to decide the GST classification of online games. The GoM must respect the view of stakeholders, including the players of online games, executives of online gaming platforms and experts of technology law of online gaming industries. The GoM can classify the tax rates as per the classification of online games i.e., 18%, and not at the rates of chance-based games, as proposed by the GoM, i.e., 28%.

The current rate of GST levied on online fantasy sports is 18% on the services provided by the concerned gaming platform under the charge of Section 9 of the Central Goods and Services Tax Act. The amount wagered in online gaming or gambling are considered “actionable claims”, which fall under the purview of goods supply. Similar to the rate of tax on gambling-related services, actionable claims in the form of a chance to win in betting, gaming, or horse racing in race clubs are subject to 28% GST under the taxation schedule for goods.

As per the aforementioned viewpoint, online skill-based games must be taxed at the rate of 18% GST. One the other hand, services and actionable claims, as discussed above, related to betting, gambling, and horse racing must be subject to the rate of 28% GST.

Further Issues Faced by Online Gaming in terms of Taxation

Additionally, there are further underlying issues in the taxation of online gaming. There are no particular valuation standards applicable to games of skill, and only the operator’s compensation is taxed.  When the money is deposited by the player, a certain share of the money deposited by the player is paid to the service provider for providing the service. This is chargeable under at the rate of 18% GST. After deducting the service charge, the remaining share of the money enters the pool account, and it is provided to the winner of the contest. This does not qualify to be taxable at the instance of the online game under GST, as it is the income of the winner of the concerned game, and is liable to be taxed under the Income-tax Act, 1961. If this amount is also taxable in terms of other gambling and betting games, the taxation would be fatal for the growth of the industry.

At present, the online gaming industry in India is at the precipice of great growth. If the amounts involved are charged tax on 100% face value, this growth will be severely hindered.

Global Taxation Standards

In nations including the United States of America, the United Kingdom, Germany, and Australia, tax rates vary between 15% and 20%, depending on whether it applies to fees, and Gross Gaming Revenue (“GGR”): the difference between money received and money paid out. According to the official Memorandum of Ministry of Finance, dated 24th May 2021, the GST council’s strategy appears to be to reopen Pandora’s Box by asserting that the nature of such online games is that of gambling or betting. This appears to be a reconsideration or reopening of cases that have been discussed earlier in this article, heard by the High Courts and have passed the test. One can only hope that the GoM will produce positive suggestions by providing some guidelines or explanations regarding the applicable rates of taxation on games that have previously been determined by the High Courts to be games of skill.

Suggestions and Conclusions

The current situation calls for GST to be levied upon the entry fee and the service provided by the online gaming platform. If the tax on 100% face value is imposed it will hinder the growth of the gaming industry. By providing adequate tax slabs for skill-based gaming, the Government will demonstrate its commitment to this emerging sector. Additionally, it would be very beneficial for the GST council if they segregate the topic of taxation for the skill gaming sector from other entrants.

For example, the activities of horse racing and betting at casinos are entirely different from each other. Therefore, the input from experts of particular fields would be highly valuable in the process of determining tax slabs.

The situation at hand would greatly benefit from the formation of a GST proposal regarding the online gaming industry after taking suggestions from the stakeholders of online gaming, including the players of online games, executives of online gaming platforms and experts of technology law of online gaming industries, from the online gaming industry.