[Rupam Dubey and Parth Kantak Mangrish are 3rd-year B.A., LL.B. (Hons.) students at the National Law School of India University, Bangalore]
The emergence of affordable internet in India has had a profound impact on the country’s mobile gaming industry. With increased accessibility to the internet, more people have been able to engage in online gaming, resulting in India becoming one of the largest mobile gaming markets worldwide. This growth is projected to continue, with an estimated increase of $8.5 billion in the market by 2027. Given the substantial growth and economic significance of the online gaming industry, the Union government has recognised the need to address taxation in this sector. The measures of the government seek to ensure that appropriate taxes are levied on gaming activities while also preventing tax evasion and ensuring fairness.
To this end, the Finance Bill of 2023 introduced a significant change in the taxation of online gaming winnings. Previously, a threshold of Rs 10,000 was established for Tax Deducted at Source (TDS) purposes, meaning that tax was deducted when winnings exceeded this amount. However, the new amendment replaced this threshold with a flat 30% tax on the net winnings from online gaming platforms. This change aims to simplify the taxation process and ensure that taxes are paid on all significant winnings.
In addition to the changes in direct taxation, amendments were also made to the Goods and Services Tax (GST) applicable to winnings from these gaming platforms. Games of chance, such as those primarily based on luck or random outcomes, are now subject to 28% GST, while games of skill, which require a certain level of expertise and strategy, are subject to 18% GST. This distinction recognises the varying nature of different types of games and their associated tax implications. However, in the recent GST Council meeting, based on the second report of the Group of Ministers, the GST Council decided to levy a uniform 28% tax rate regardless of the nature of the game. This increases the burden on the gaming industry since now the distinction between the game of skill and chance and the effective difference in their taxation rate is extinguished.
This increases the concerns that have been raised regarding the potential double taxation of the same prize pool. This post argues that the combination of income tax on net winnings and the GST on the prize pool can result in a situation where the same funds are subject to multiple tax burdens. This could impose a significant financial burden on the gaming industry and potentially discourage its growth. To address these concerns, this post looks at international legal precedents. By examining how other countries have dealt with similar challenges, it proposes a balanced solution that considers the interests of both tax authorities and the gaming industry. The aim is to develop a taxation framework that effectively prevents tax evasion while also ensuring that the gaming industry is not unfairly burdened by excessive taxation.
The Indian Taxation Maze: Unveiling the Framework and Consequences of Dual Taxation
On December 23, 2022, the Government of India introduced the Government of India (Allocation of Business) (370th Amendment) Rules 2022, assigning matters related to online gaming to the Ministry of Electronics and Information Technology (MeitY). Consequently, MeitY issued the Draft Information Technology Rules 2023, which proposed a lightly regulated framework aligned with Section 69A of the Information Technology Act, 2000. These rules required the establishment of a Self-Regulated Body (SRB) to act as a quasi-judicial entity responsible for certifying and registering every game with the Government, as well as providing clarifications on related matters. The objective behind these initiatives was to bring clarity to tax administration by determining the applicable tax rates for different games.
The Ministry of Finance promptly announced a 30% tax on the net winnings from online gaming platforms as Tax Deducted at Source (TDS), under Section 194BA of the Income Tax Act, 1961. This decision eliminated the previous minimum threshold of Rs 10,000 for TDS purposes. This development raised the question of whether GST should be levied on online gaming and, if so, at what rate?
The decision of the 50th GST council meeting compounds the problem further, wherein there will now be a uniform 28% tax that will be levied on the gaming industry as a whole. It could be argued that this resolves the problem of self-regulating bodies deciding whether a game is game of skill or chance to decide the tax rate (which became a contentious issue in the Gameskraft case). However, such an argument does not account for the steep burden that is imposed on the gaming industry. Additionally, the Government stated that the tax would be imposed on the platform fee, or the consideration paid by players. However, this approach raises concerns that taxing the platform fees equates to taxing the prize pool, as the consideration paid by players ultimately contributes to the prize pool. A similar argument was used in Gurdeep Singh Sachar v Union of India, where it was determined that the amount pooled in the escrow account constitutes an actionable claim and is taxable under entry 6 of schedule III, section 7(2) of the Central Goods and Services Act, 2017 (CGST Act). It could however be suggested that rule 31A (3) of the CGST Act is not applicable, as actionable claims cannot be considered a supply of goods or services and should be exempt from GST. However, this counterargument falls flat when one notes that schedule III, section 7 of the CGST Act, 2017 permits the taxation of such actionable claims, making rule 31A (3) of the CGST Act introduced by an amendment act under section 9 of the CGST Act in 2018 ultra vires of the said statute itself, as it is not consistent with other sections of the same act.
In summary, TDS is now applicable at a rate of 30% on net winnings or the prize pool, and GST is also applicable at 28%, on the gaming industry. This creates the issue of dual taxation, placing an unfair burden on the emerging gaming industry in the country. To simplify, consider an example of Game A, which is a game of skill, and a player X who plays it. If player X wins Rs 500, the applicable taxes would be 30% TDS and 28% GST. Applying 28% GST to the net winnings of Rs 500, the GST amount would be approximately Rs 140, leaving Rs 360 as the taxable amount. However, under the current framework, TDS is applied to the entire prize pool of Rs 500 (resulting in Rs 150 as TDS). This leads to dual taxation, unfairly burdening the gaming industry.
Industry Disruption: Unveiling the Impact and Consequences of Transformational Changes
The high tax rates implemented by the Union Government create incentives for users to shift to offshore and grey market operators who evade taxes in India. This will result in significant tax revenue leakage amounting to billions of rupees. One counterargument could be made using Section 12 of the Integrated Goods and Services Act, 2017 (IGST Act), which states that imported services are subject to taxation if the place of supply is within India’s jurisdiction. Additionally, the proviso to Section 14(2) of the IGST Act places the responsibility on offshore Online Information Data Base Access and Retrieval (OIDAR) service providers to appoint a person to pay integrated tax. However, this approach falls short, as offshore betting and gambling platforms have not appointed any local representatives in India who are registered to pay taxes on their behalf. Furthermore, these companies have not even applied for registration under the Simplified Registration Scheme in Form GST REG-10. This indicates a tendency of tax evasion on the part of offshore companies, rendering the use of Section 12 of the IGST Act ineffective.
To provide context, a report by the Federation of Indian Chambers of Commerce and Industry in 2013 highlighted that betting and gambling in India amount to INR 300,000 crore and result in revenue leakage ranging from INR 12,000 crore to INR 19,000 crore in 2013. This results in substantial loss of revenue to the Government.
Furthermore, under the pre-GST regime, online gaming was treated differently. For example, service tax was imposed on the Gross Gaming Revenue (GGR) rather than the prize pool, as per the Service Tax Act, 1994. However, the operations of such platforms have not fundamentally changed, and the online gaming industry’s legitimate expectation is to have certainty in terms of tax payment, similar to what they have been paying for the past decade. Moreover, countries like the US, UK, and Australia levy GST only on GGR or platform fees. Therefore, any change in the tax regime would burden the industry with additional taxes, potentially creating an unsustainable market and forcing many small operators to exit. This would adversely impact revenue growth in the long run, potentially leading to the industry’s demise.
In light of these concerns, we propose that India should examine international best practices to strike a balance between preventing revenue leakage and promoting the growth of the emerging online gaming industry. The second part of the post will explore international legal precedents to argue for a sustainable tax rate that balances competing interests and avoids dual taxation of the online gaming industry.
[to be continued]
– Rupam Dubey & Parth Kantak Mangrish