NOVEMBER 15, 2023

By Rajeev Kapoor, Pr ADG, DGPM

ONLINE gaming industry has seen a rapid surge in last few years and is estimated to be worth USD 2.7 bn presently with an expected growth of 25-30% annually. Revenue from online gaming grew 30% in 2022. The levy of GST on online gaming has been a contentious issue before the taxation authorities. There have been disputes with respects to online games being game of skill or game of chance. A linked issue with this has been the value at which tax shall be levied.

A GOM (Group of Ministers) was constituted to look into the issues related to taxation on online gaming, casinos and horse racing. GOM in its second report which was placed before 50th GST Council meeting held in July 2023 had recommended that no consensus could be reached on whether the activities of online gaming should be taxed on 28% on the full face value of bets or on the GGR (Gross Gaming Revenue), so the GST Council may decide the issues. GST Council after the meeting recommended that suitable amendments to be made to the law to include the online gaming in Schedule III of GST Act as actionable claim. Online gaming to be taxed at the uniform rate of 28% on the full value of bets placed in the case of online gaming irrespective of whether the activities are a game of skill or chance. GST Council in its 51st meeting held on 2nd August, 2023 recommended certain amendments in the CGST Act and IGST Act.

Recent changes in GST law and provisions with respect to online gaming have been brought after discussions with various stake holders. These legal changes have brought clarity on the levy of GST on online gaming by providing clear legal framework with respect to taxability and valuation of online gaming. Important change has been brought by amendment to Schedule III of CGST Act 2017. Paragraph 6 of Schedule III which earlier read as "Actionable claims, other than lottery, betting and gambling" has been amended by substituting the words "specified actionable claims" for the words "lottery, betting and gambling".

To make it clear what are 'specified actionable claims', a separate definition has been provided in Section 2(102A) of the CGST Act by defining "specified actionable claims" as actionable claims involved in or by way of betting, casinos, gambling, horse-racing, lottery or online money gaming.

Both "online gaming" and "online money gaming" have been defined in the CGST Act. "Online gaming" has been defined in Section 2(80A) of CGST Act as offering of a game on the internet or an electronic network and includes online money gaming. "Online money gaming" has been defined in Section 2(80B) of CGST Act, 2017 as online gaming in which player pays or deposits 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 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.

Thus an important element in Online money gaming is that here a player pays money for the game in expectation of winning money irrespective of whether outcome is based on skill, chance or both.

To take care of transactions done through virtual digital assets, the definition of "Virtual digital Asset" has been added in Section 2 of CGST Act. To keep parity with Income Tax Act, the meaning assigned to it in Section 2(47A) of Income Tax Act,1961 has been taken.

An important issue in the case of online money gaming is, who is the supplier of online games, whether the person owning or operating the digital platform or the person who organizes or arranges the online game. An amendment has been made in the definition of "supplier" in clause (105) of Section 2 of CGST Act. It provides that a person who organises or arranges, directly or indirectly, supply of specified actionable claims including a person who owns, operates or manages digital or electronic platform for such supply, shall be deemed to be supplier of such actionable claims, whether such claims are supplied by him or through him and whether consideration in money or money's worth, including virtual digital assets, for supply of such claims is paid or conveyed to him or through him or placed at his disposal in any manner, and all the provisions of this act shall apply to such supplier of specified actionable claims, as if he is the supplier liable to pay tax in relation to the supply of such actionable claims. The definition thus emphasises on the person who directly or indirectly organises or arranges the supply of online money gaming. To make it amply clear, it has been specified in the definition that supplier includes a person who owns, operates or manages digital or electronic platform for such supply.

To address the issue of supply of online money gaming by a person located outside India, a new section 14 A has been added to IGST Act, 2017 to provide for special provisions for supply of online money gaming by a person located outside India. It provides that supplier of such gaming shall take up single registration under simplified registration scheme. It further provides that if such supplier does not have a physical presence or does not have a representative in the taxable territory, he shall appoint a person, for the purpose of paying integrated tax and this person will be liable to pay tax. In case of failure to comply with these provisions, any information generated, transmitted, received or hoisted in any computer resource used for supply of online money gaming by such supplier shall be liable to be blocked for access by the public.

It has been further provided that IGST would be levied on the import of online money gaming in accordance with the Section 5(1) of the IGST Act, 2017. Import of online money gaming has been removed from the ambit of Customs Tariff Act,1975.

Changes have been made with respect to registration by inserting a new clause in Section 24 of the Act to provide for mandatory registration for person supplying online money gaming from a place outside India to a person in India. Rule 46 of CGST Rules, 2017 has been amended to make it mandatory for online money gaming service providers providing services to unregistered recipients to mention the name of the state of the recipient on the invoice. Rule 64 of CGST Rules has been substituted with new rule which prescribes overseas suppliers of online money gaming service to file a return in FORM GSTR-5A on or before the twentieth day of the month succeeding the calendar month.

Valuation of supply is an important issue while taxing any supply. As the value of supply in online gaming has been an area of dispute, provisions have been made in CGST Act and Rules to address the issue on what value the tax is to be levied in the case of supply of online gaming. Section 15(5) of CGST Act, 2017 empowers Government on the recommendations of GST Council to determine value of such supplies as may be notified. By exercising the power under this sub section, Government has notified supply of online money gaming, supply of online gaming other than online money gaming and supply of actionable claims in casinos.

A new Rule 31B has been added in CGST Rules. This Rule provides that 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 or deposited with the supplier by way of money or money's worth by or on behalf of the player.

To address the doubts regarding taxability of amounts returned or refunded by the supplier to the player, Proviso to this rule provides 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.

To deal with the question what happens to the amount received by the player by winning any game and used for playing by him in a further game without withdrawing the same, an Explanation has been added which says, for the purpose of Rule 31B, any amount received by the player by winning any event including game, scheme, competition or any other activity which is used by the player in a further event without withdrawing shall not be considered as the amount paid or deposited with the supplier by or on behalf of player.

This new legal framework will help in bringing clarity to the issues related to levy of GST on online gaming and reduce the tax disputes.