APRIL 03, 2023

By Hardik Shah & Kumar Parekh

ONLINE gaming industry in recent years has witnessed tremendous growth in India. With the proliferation of smartphones and affordable data plans, more and more people are now playing online games. The Indian gaming industry is estimated to be worth .1 billion, and it is expected to grow at a CAGR of 20% to reach .7 billion by 2024. However, with the introduction of the Goods and Services Tax (GST) in India, the online gaming industry has been facing new challenges in terms of tax compliance.

GST is a comprehensive indirect tax levied on the supply of goods and services in India. Since its introduction in 2017, GST has become an important aspect of the Indian taxation system. The online gaming industry is no exception to GST and at present, it is one of the industries facing constant hardship over taxability of GST.

Online gaming, which is subject matter of discussion, can be broadly classified into two categories - skill-based gaming and chance-based gaming.

Skill-based gaming requires a certain level of skill, strategy or knowledge. The classification as a game of skill or chance is based on the dominant factor that determines the outcome of the game. In a game of skill, the outcome is determined primarily by the player's skill, knowledge, and experience. From GST perspective, skill-based gaming is intended to be taxed under 'Other Online Content' vide SAC classification of 998439 ¹, taxable @18%. However, the explanation note very clearly specifies that the service category will not include any gambling service which are categorized as game of chance. At present, gaming companies discharge GST only on platform fees or rake charges and the same is classified under 'Other online content' services.

Chance-based gaming, on the other hand, are based on luck, such as slot machines and lottery games. Chance-based gaming is equated with betting, lottery and gambling which are excluded from the purview of actionable claims and, thereby, taxable at the highest rate of 28%. Usually, the GST rate on chance-based gaming is based on the face value of the bet. For example, if the face value of the bet is Rs. 100, the GST payable would be Rs. 28 (28% of Rs. 100).

Seeing above legal complexities, it would be crucial to discuss whether the services provided by an online gaming company will be categorized as “other online content” services, in light of either skill-based game or chance-based game.

It is very difficult to decipher differentiation between skill-based game and a chance-based one. When Niti Aayog issued a draft paper in December 2020 on the guiding principles for regulation of online fantasy sports platform in India, it was categorically stated that there is no objectively definable test or regulatory guideline or administrative forum to assess and determine if a game will be characterized as a game of skill or game of chance. In such a scenario, the authors would like to take a microscopic look at what Courts in India have held from time to time.

The Hon'ble Supreme Court ² is of the view that:

i. The competitions where success depends on substantial degree of skill are not 'gambling'; and

ii. Despite there being an element of chance, if a game is preponderantly a game of skill, it would nevertheless be a game of "mere skill".

In a separate matter, the Hon'ble Punjab & Haryana High Court ³ has relied upon the judgment of Hon'ble Supreme Court in the matter of Dr. K.R. Lakshmanan (supra) and held that success in Dream 11's fantasy sports basically arises out of user's exercise of superior knowledge, judgement and attention and, therefore, it is a game of skill and not a game of chance. SLP filed against the order of Hon'ble Punjab & Haryana High Court has been dismissed by the Hon'ble Supreme Court ⁴. Moreover, in another matter, the Hon'ble Bombay High Court ⁵ has also examined this issue in respect of online Dream 11's Fantasy Games and observed that the activities performed by 'Dream 11 Fantasy Pvt Ltd' do not involve any betting or gambling as their result is not dependent upon winning or losing of any particular team in real world on any given day. However, a three Judges Bench of Hon'ble Supreme Court has issued the notice and stayed the operation of above judgement passed by Bombay High Court until further orders. This suggests that game of skill vs game of chance is a very grey area and requires a detailed assessment followed by apposite guidelines addressing taxability & valuation of services.

Even, the online gaming company Gameskraft Technologies Private Limited, situated in Karnataka, has received a show-cause notice from the Directorate General of GST Intelligence (DGGI) for failing to deposit GST between 2017 and June 2022 on the total entry fees / value collected from each participant, attracting GST @ 28%. This shows that the Authorities are not paying heed to interpretations of various High Courts and are litigating the matter even in absence of any guidelines on how to determine a particular game to be of skill or chance.

Considering the need, a committee of Group of Ministers (GOM) was formed by the GST Council to review and develop a new GST tax structure for the online gaming sector. Till date, no consensus is achieved in determining the GST rate and value on which GST is supposed to be applied resulting into divergent views and ongoing danger on the existence of industry.

At this juncture, it is anticipated and indicated by officials that the report of the GOM on GST on online gaming, horse race and casinos would be taken up for discussion and all being well, for approval by GST Council in upcoming tentative meeting in June this year. It is high time that clarity is provided for an amicable solution for the government and industry.

[Hardik Shah, Director and Kumar Parekh, Manager, Deloitte Haskins & Sells LLP. The views expressed are strictly personal.]

¹ This service code includes games that are intended to be played on the Internet such as role-playing games (RPGs), strategy games, action games, card games, children's games; software that is intended to be executed on-line, except game software; mature theme, sexually explicit content published or broadcast over the Internet including graphics, live feeds, interactive performances and virtual activities; content provided on web search portals, i.e. extensive databases of Internet addresses and content in an easily searchable format; statistics or other information, including streamed news; other on-line content not included above such as greeting cards, jokes, cartoons, graphics, maps

Note: Payment may be by subscription, membership fee, pay-per-play or pay-per view.

This service code does not include:

- software downloads, cf. 998434

- on-line gambling services, cf. 999692

- adult content in on-line newspapers, periodicals, books, directories, cf. 998431

² Dr. K.R. Lakshmanan v. State of Tamil Nadu [1996] 2 SCC 226

³ Varun Gumber v. Union Territory of Chandigarh 2017 SCC Online P&H 5372

⁴ [SLP (C) No. 026642/2017]

⁵Gurdeep Singh Sachar v. Union of India [2019] 106 taxmann.com 290/75 GST 258 (Bom.) = 2019-TIOL-2687-HC-MUM-GST