SEPTEMBER 07, 2023

By Pawan Arora, Adv. (CA),Partner, Athena Law Associates

1. THE Government vide Notification No. 45/2023 (CT) dated 06.09.2023 has introduced Rule 31B to determine the valuation of Online Gaming and Online Money Gaming. The said Rule reads as under:

“31B. Value of supply in case of online gaming including online money gaming.

Notwithstanding anything contained in this chapter, the value of supply of online gaming, including supply of actionable claims involved in online money gaming, shall be the total amount paid or payable to or deposited with the supplier by way of money or money's worth, including virtual digital assets, by or on behalf of the player:

Provided that any amount returned or refunded by the supplier to the player for any reasons whatsoever, including player not using the amount paid or deposited with the supplier for participating in any event, shall not be deductible from the value of supply of online money gaming.

Explanation: For the purpose of rule 31B and rule 31C, any amount received by the player by winning any event, including game, scheme, competition, or any other activity or process, which is used for playing by the said player in a further event without withdrawing, shall not be considered as the amount paid to or deposited with the supplier by or on behalf of the said player."

Relevant definitions under the CGST Act, 2017

2. The definitions of the terms ‘Online Gaming' and ‘Online Money Gaming' have been inserted vide Central Goods and Services Tax (Amendment) Act, 2023 . The said definitions read as under:

'(80A) " online gaming" means offering of a game on the internet or an electronic network and includes online money gaming.

(80B) "online money gaming" means online gaming in which players pay or deposit money or money's worth, including virtual digital assets, in the expectation of winning money or money's worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both and whether the same is permissible or otherwise under any other law for the time being in force;';

3. The above said Rule and amended provisions in the Act shall be made effective from the date to be notified by the Government.

4. In Rule 31B, the Government has provided the valuation mechanism of the following supplies:

a. Supply of online gaming services

b. Supply of actionable claims involved in online money gaming

5. The value of the above two supplies shall be as under:

a. Total amount paid/payable to the Supplier, or

b. Total amount deposited with the Supplier

6. In case of Online Gaming Company, for the supply of online money gaming services, the amount paid/deposited by the user with the Company for playing the game (i.e., user contribution in the game pool including amount charged as platform fees) shall be considered as value of supply.

Deductions not allowed from above value of supply

7. The Proviso to Rule 31B provides that no deduction of the following shall be allowed from the value determined as per the Rule above:

- Amount returned or refunded to user for whatsoever reason

- Unused amount paid or deposited with the supplier for participating in any event

8. From the above said proviso, the intent of the Government can be clearly brought out that they want to tax the entire amount which has been deposited by the User with the Online Gaming Company.

9. It further seems that Government wants to tax the amount deposited by the User, immediately on transfer of the same to the Online Gaming Platform as the entire deposited money is taxable without any deduction on account of refunds or non-usage of money. However, one situation still remains untouched i.e., wherein the amount deposited by the User may be used for availing other services on the Online Gaming Platform attracting a different rate of tax.

Amount contributed out of Winning/Bonus/Incentives-Not to be added for Valuation

10. The Explanation to Rule 31B further provides that when a User uses any amount received by the User by winning any-

- event,

- game,

- scheme,

- competition, or

- any other activity or process

(without withdrawing), the same shall not be considered as paid/payable/deposited with the Supplier.

11. Thus, the amount contributed by the User which he has received from winnings of the game shall not be included in the value of both the above-mentioned supplies.

12. It is to further note that although the term ‘winning' is used in the Explanation, however the same is followed by multiple terms like scheme, activity, process, etc. Thus, a view may be taken that the amount received by the User in following scenarios, shall also not be includible in the value of the said supplies:

- Company has announced a scheme that Rs 10 shall be given as joining bonus. The said Rs 10 may be considered as a ‘winning' amount under a ‘scheme' by the User.

- Company has made a policy that if a User plays for four hours on an average per week, then the User shall be eligible for an incentive of Rs 50/- or Virtual Digital Assets. The said incentives may be considered as a ‘winning' amount from an ‘activity' by the User.

- Similarly, if the Company offers any incentive/amount for following a particular process on the Online Gaming Platform, the same may be considered as ‘winning' from ‘process'.

13. However, Online Gaming Industry should seek clarification on taxability of amount used by the User which the User has received from bonus, incentive, etc.

Time of Supply

14. It is to note that the liability to pay tax to the Government on services arises at the “time of supply” as provided under Section 13 of the CGST Act.

15. Section 13(2) of the CGST Act provides that time of supply arises at the earliest of the following:

- Date of invoice / provision of service in cases where the invoice is not issued within the prescribed period, or

- Receipt of payment

16. Section 13(5) of the CGST Act provides that where the time of supply is not determinable under the aforesaid sub section (2), then the time of supply shall be the date on which the periodical GST Return is to be filed.

17. Thus, where the amount deposited by the player/user with the Supplier is only towards online money gaming, then the time of supply shall be the date on which the supplier has issued the invoice or received the money, whichever is earlier.

18. However, where the amount deposited is utilizable towards supplies attracting different rates of tax or exempted/non-taxable, the time of supply in such a case, has to be determined as per Section 13(5) i.e., the month in which such transaction is to be reported in the GST returns.

19. The Government may come up with clarifications/amendment with respect to the time of supply for online money gaming which may clear the exact position or the Online Gaming Industry may seek clarification for the same.

Specific Comments by the Author:

20. The Online Gaming Industry should seek clarification from the Government with respect to:

- Taxability of bonus/incentive used by the User for playing games

- Time of Supply in case where the amount deposited by the user can be used for services attracting different rate of tax.

21. The proviso of Rule 31B may be challenged on the ground that refunded/ refundable consideration shall be considered as part of the Value against a service which is not being supplied by the Online Gaming Companies.