[Opinion] Online Gaming Industry – Tax Trapeze & The Roller Coaster

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  • Last Updated on 5 December, 2023

Online Gaming Industry

Aseem Chawla – [2023] 157 taxmann.com 61 (Article)


The Online Gaming Industry has observed substantial growth in India and has become one of the burgeoning sectors witnessing a shift in individual preferences & habits of a New Young India. The advent of technology and the rise in internet users have led to a paradigm shift with regard to the functioning of the Gaming Industry, making it the fourth largest sector in the media and entertainment industry, it has seen commendable growth over the years and is now pegged at US$ 2.6 billion industry. The potential revenue contribution to the Exchequer has the potential to increase by tenfold compared to the Rs 1,700 crore collection during FY 2022-23.

‘Online Gaming’ comprises those games that are played by users over the internet, these games are classified as either a Game of Skill or a Game of Chance where the outcomes are dodged based on factors such as knowledge, skill, experience of the player luck, and random events.

Goods and Service Tax (“GST”) is a transaction tax and its applicability on a transaction is intricately related in a manner that economic activities & transactions embedded therein are inter-connected and modeled.

As the Gaming world has proffered, the ascertainment of associated Tax Implications has progressively become relevant. In the past, the industry has experienced several rulings on the levy of GST where the tax was only applicable to the platform fee and not to the face value of the money, which was deposited by the users, thus excluding the total value of each bet.

In the 50th meeting of the GST Council held on July 11, 2023, a resolution was reached to subject tax in Casinos, Horse Racing, and Online Gaming to a 28% GST rate based on their full-face value.

This impost applies regardless of whether these activities were differentiated as Games of Skill or Chance.

In the subsequent 51st meeting of the GST Council, held on August 2, 2023, the GST Council confirmed specific modifications to the Central Goods and Services Tax Act, 2017 (“CGST Act”) and the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), with reservations taken on record by the State(s) of Delhi, Sikkim, and Goa.

The said meeting proposed the inclusion of a specific provision in the IGST Act to the effect, thereby attracting the liability of a person located outside India, who supplies online money gaming to a person in India. Such a person shall be obligated towards certain compliances, failure thereof would involve blocking access to such gaming platform by the public. At the same time, the Council also consented to assess the execution of the said resolution after a span of six months from its commencement. Thus, to achieve this objective, two bills viz., Central Goods and Services Tax (Amendment) Bill, 2023 and Integrated Goods and Services Tax (Amendment) Bill, 2023 were placed which received Legislative approval from the Parliament on August 11, 2023. Thus, the 28% GST on Online Gaming stands levied and becomes effective from October 1, 2023.

So far 21 states have got their bills passed by the respective legislatures for the levy of 28% GST on Online Gaming, of which the most recent includes Uttar Pradesh, Maharashtra, Karnataka, and Madhya Pradesh.

Legislative Ecosystem – Online Gaming Industry

Online Gaming regulations in India are still evolving increasingly, the paramount legislation dealing with gaming in India is the Public Gambling Act, 1867which governs the betting and gambling activities in India. The Act differentiates the game in terms of Skills and Chance and many of the States have adopted this and many have developed their own state legislations. However, the Act does not deal with Online Gaming.

The Ministry for Electronics and Information Technology (“MEITY”) has apprised several amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Intermediary Rules, 2021”) (in the exercise of powers conferred by sub- section (1), clauses (z) and (zg) of sub-section (2) of section 87 of the information technology Act, 2000), most recently been amended on 6 April 2023 which creates obligations for Online Gaming Industry (“OGI”) with respect to the disclosures, grievance redress sals, and compliance. These rules delineate the aspects of Online Gaming. It deals with the registration and verification of the intermediaries involved in Online Gaming. Moreover, it describes carrying out the due diligence procedures by these intermediaries. Further, other than out rightly banning gambling and betting activities, an idea for Self-Regulatory Body (“SRB”) was also introduced comprising experts from different fields. A welcome step would be that the Group of Ministers (“GoM”) may consider taking inputs from all the States and Union territories to incorporate uniformity in the legislation vis-à-vis the interests of all the stakeholders.

The legal structure and judicial pronouncements regarding Indirect Taxes have consistently differentiated between Games of Chance which involve betting and Gambling and Games of Skill. This distinction has been upheld both before and after the implementation of the GST regime, influencing regulatory considerations and the application of tax rates and supply values.

The Finance Act has, inter-alia, amended the provisions of the Income Tax Act, 1961 whereby new sections 194BA and 115BBJ have been introduced within the scheme of the Income Tax Act, 1961 to acknowledge Online Games as a distinct and modern industry. Now the OGI is required to deduct tax at 30% from the net winnings of the user accounts, either during the same FY in case of withdrawal or at the end of the financial year. Moreover, the Apex Direct Tax Body, the Central Board of Direct Taxes (‘CBDT’) vide Notification No. 28/2023, dated May 22, 2023, announced the introduction of Rule 133 through the Income-tax (Fifth Amendment) Rules, 2023 which outlines the method for calculating ‘Net Winnings’ derived from online games, as specified under both section 115BBJ and section 194BA of the Income Tax Act, 1961.

Before the said amendment changes, a 30 percent Tax Deducted at Source (“TDS”) rate applied only to winnings exceeding INR 10,000. The new rules have increased taxes for users and compliance demands for Online Gaming Entities (“OGIs”). Despite this, the industry views the changes positively for providing clarity and recognizing Online Gaming as a distinct sector.

The aforesaid amendments confirm that only net winnings are taxable. On May 22, 2023, the Government outlined methods for calculating net winnings during withdrawal and year-end, along with the CBDT issuing guidelines vide Circular No. 5/2023 to address challenges.

Importantly, due to the new TDS system and removal of the previous INR 10,000 threshold, all winnings and prize money are now taxable. Platforms are responsible for deducting tax at the 30 percent rate on net winnings. These TDS changes prevent revenue loss for the Government and ensure taxation across all components. The comprehensive tax policies apply to the entire value chain of online skill-based gaming, considering both income tax and GST.

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