JANUARY 29, 2020

By Rohini Mukherjee, Joint Partner, Lakshmikumaran & Sridharan

WHILE issuance of clarifications is the order of the day in the GST regime, certain areas have remained untouched by such clarifications, one such grey area being the taxability of prize money.

An instance of prize money is in the events of horse racing wherein a prize money is given to the owners of the winning horses from the stake money for the race. The stake money is a pool of money which is composed of equal contributions by the club or body ("club") organising the races and the horse owners whose horses participate in the races. In a typical event of horse racing, horse owners allow their horses to participate in the race on payment of an entrance fees for the race. The horse owners do not undertake any activity for the club organising the race other than enrolling their horses for the races conducted by the club and allowing the horses to participate in the races.

The moot question is whether this prize money is taxable in the hands of the horse owners.

GST is levied on a supply made for a consideration subject to certain exceptions wherein a supply without consideration also comes under the tax umbrella of GST. For a payment to qualify as consideration, it should be in respect of, in response to or for the inducement of a supply. This is commonly known as quid pro quo (something in return).

A direct link between the payment received and the supply made by the supplier of goods or services or both is essential for such payment to qualify as consideration for a supply.

In this backdrop, the question is whether the prize money is in return for any activity done by the horse owners?

A fact worth noting is that the prize money is only given by the club to the owners of the winning horses and not to all the participating horses. There is no direct link between the provision of horses for the races conducted by the club by the horse owners and the payment of prize money made by the club to the horse owners of the winning horses. In other words, it is not the participation of the horses in the races which gives rise to the award of the prize money. On the other hand, the payment of the prize money is contingent upon achievement of the result at the end of the race by the horses which is an uncertain event.

One possible view is that in the absence of any direct link between the activity of horse owners of enrolling their horses for the races and the prize money awarded by the club to the owners of the winning horses, it cannot be said that the amount of prize money is consideration for the horse owners in respect of the activity of enrolling the horses for the races. On this basis, it can be argued that GST is not payable on prize money.

With respect to the treatment of prize money, under EU law, VAT Notice 701/5-Clubs and Associations which deals with the treatment of prizes states that there is no applicability of VAT on prize received in various forms including in cash.

The ruling of the European Court of Justice (ECJ ¹) is notable in this regard wherein one of the questions before the ECJ was whether the supply of a horse by a horse owner to the organizer of a race for the purpose of participation in a race is taxable supply of services for consideration and if so, whether the prize money won in the race (which is not provided to every horse taking part in the race) be regarded as the consideration.

The ECJ held that for classifying a supply of service as a 'transaction for consideration', it is required that there should be a direct link between that supply and the consideration actually received by the taxable person. The ECJ further held that it is not the supply of the horse by its owner to the race organiser which, as such, gives rise to the award of prize money, but the achievement of a certain result at the end of the race, namely the placing of the horse. Even if the race organiser were to have committed himself to awarding such a prize, of a fixed amount known in advance, the fact remains that the award of the prize is subject to a specific performance and to a degree of uncertainty. Such uncertainty precludes the existence of a direct link between the supply of a horse and obtaining a prize. On this basis, it was held that prize money cannot be regarded as consideration and VAT was leviable.

On the other hand, the ruling issued by the Australian Government-Australian Taxation Office ² which deals with the applicability of GST on prizes had stated that a registered winner of a prize in an event, having participated in the event in the course or furtherance of an enterprise they carry on, has a GST liability for the supply of their participation where there is a sufficient nexus between the prize and the supply.

While on the one hand, the ECJ has held that prize money provided to the horse owners based on the result of the race will not qualify as consideration for the activity of participation in the race. On the other hand, as per Australian GST law, the same shall be considered to be taxable.

The above indicates that there is contradictory foreign jurisprudence on the subject matter.

In the Indian context under GST, in a recent advance ruling³, the question whether receipt of prize money from horse race conducting entities amounts to supply under GST was considered. It was held that activity of rearing, training, maintaining and providing the specialised horses according to the requirement of appropriate race authorities for participating in races is an activity in return for prize money and hence, subject to GST @18%; covered under Entry no. 35 of  11/2017-CTR.

It is interesting to note that while a clarification ⁴ has been issued regarding levy of GST on entire bet value, the issue of applicability of GST on prize money has been left untouched. Additionally, in the Minutes of 35th GST Council Meeting, though the rate and valuation issues of horse racing were referred to the Fitment/Law Committee, the issue of prize money was not considered.

Owing to the abovementioned advance ruling and varied foreign jurisprudence, this is an area which is ripe for litigation. There is an imminent need for a suitable clarification in this regard which can aid in bringing in uniformity in treatment of prize money in the industry.

[The views expressed are strictly personal.]

¹ Odvolací financní reditelství, v Pavlína Baštová (ECJ Case C-432/15)

² GSTR Ruling 2002/3

³ Vijay Baburao Shirke - 2019-TIOL-314-AAR-GST

⁴ Circular No. 27/01/2018-GST dated 04.01.2018