Fair GST implementation on skill-based online games could reshape the Indian online gaming sector

The Indian online gaming industry has been flourishing in the past few years with the emergence of new startups and has witnessed a considerable amount of positive economic impact. This sunrise sector in India has gained significant momentum due to the ‘Digital India’ initiative by the Prime Minister which promotes internet access to citizens at affordable rates, penetration of the use of mobiles across social and demographic barriers and India’s enthusiasm to adopt and adapt to the online gaming platforms. However, despite the encouragement and positive feedback received from the government, the industry awaits a clear judgment on GST restructuring and rate rationalisations on the online games.

To determine whether or not GST is applicable on the total transaction value, which includes the prize money, or the net commissions (revenues) that accrue to gaming firms, the GST Council and Ministry of Finance had formed a Group of Ministers (GoM). With that, the GOM is also tasked with coming up with recommendations on the GST rate to be applicable. However, the committee which was formed last year in May was dissolved and a new one was formed earlier in February 2022.

Since there’s tremendous potential in this sunrise sector, it calls for an urgent need to look at the GST levied on the industry.

Currently, services provided by online skill gaming platforms are classified under service accounting code 998439 of the GST services classification and is subjected to 18 percent on the Gross Gaming Revenue (GGR) for the service provider whereas, the games of chance attract 28% GST.

In addition, the Contest Entry Amount (CEA) which normally includes platform fee or GGR is usually between 5% – 15% and Prize Pool which is in the bracket of 85% – 95%. In most games, the average ticket size is between Rs. 25 and 35.

To put it simply: In real-money games, players have to pay an entry fee to join a gaming tournament and the total amount collected in this process less the platform fee is called the prize pool money. Different companies deal with different models of holding the prize pool money. In some cases, platforms could choose to hold the money received in a separate electronic ledger by third party service providers or payment gateways, wallets, etc. This pooled amount is later distributed among the players as prize money and the company earns a percentage (5% – 15% percent) on this amount as platform fee.

Leading global regulated markets including the UK, most countries in the EU, and Nevada, New Jersey in the US, tax on gross gaming revenue at the rate of 15% to 20%.

Moreover, Rule 31A of CGST Rules 2017 (‘Rule 31A’) deals with valuation of supply of actionable claim in cases of lottery, betting, gambling and horse racing, so as to fall within the rigours of Rule 31A which applies, according to the said rule, only to activities involving “chance to win in betting, gambling or horse racing”.

Rule 31A(3) reads as “(3) The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator.”

Since Rule 31A uses the word ‘chance’ before describing the activity it is clear that the said rule does not apply to online games based of skill. Hence this means that Rule 31A strictly applies to games involving betting, gambling or horse racing, etc.

The games of skill are not covered explicitly under the existing GST framework and the tax authorities sometimes neglect the difference between games of skill and games of chance. This clear distinction is critical as in the cases of lottery, betting, gambling and horse racing, 100 percent of the face value of the bet or amount paid into the totalisator is considered for GST.

“Actionable Claim other than lottery, betting and gambling” is covered under Entry 6 of Schedule III of CGST Act 2017. Since prize pool money is an actionable claim it is therefore exempt from levy of GST.

Hence on those lines only GGR or the platform fee should continue to be considered as the value of supply. Additionally, if there are other formats or revenue models followed by platforms such as entry fee, subscription fee, in game revenue, etc., GST should be applicable on the amount received by the platform for rendering its services.

Earlier, in erudite judgments, Rajasthan high court, Bombay high court and the Punjab & Haryana high court (upheld by the Supreme Court in appeal) quashed state laws that criminalized online games involving skill.

We urge the government to iron out the ambiguities and clarify that Rule 31A is not intended to cover games of skill and therefore is not applicable to any form of online gaming where the superior skill and technical knowledge of a gamer is dominant.  Alternatively, we recommend the government shall also consider carving out a separate rule specifically for skill based games where the GST rate applies only on the platform fee, just in the case of any other online platform supplying goods and services.

We recommend that in cases where the gaming companies’ revenue model includes a subscription fee, in-game revenues etc, GST should be applicable on only the amount received by the platform. Additionally, skill predominant games should ideally be taxed at 18 percent on the platform fee, as higher tax rates can impact the industry’s growth.

Any attempt to levy GST on the entire stake value is bound to alter player and compliance behaviour and will neither work in the benefit of the gaming industry nor the government. This as a result can hamper this booming industry’s upward trajectory and could encourage closure of businesses in the sector. The online gaming industry is need of a GST regime that can protect and promote the segment that houses over 900 Indian gaming startups.


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