Tax conundrum in online gaming landscape: All eyes on the apex court

Impending verdict on Gameskraft v/s DGGI case could reshape India's online gaming tax landscape, writes Dhanendra Kumar, IAS (Retd.)

The online gaming industry is waiting for its watershed moment with the upcoming hearing in the Honourable Supreme Court, now deferred to December 15, 2023. Marked as one of the most substantial cases of tax litigation in the country's history, the outcome of Gameskraft v/s Directorate General of GST Intelligence (DGGI) is poised to set a precedent, potentially reshaping the landscape of online gaming in India. The verdict is expected to not only address the immediate legal complexities but also chart the future course for regulatory frameworks within the industry.

The sector has already witnessed an interesting year; from being cheerful in the first few months of the year with the amendment to the IT rules recognising Online Gaming Intermediaries; to cautious optimism with the taxation of net winnings, to outright turbulence, with the levy of 28 per cent GST on player deposits.

The subsequent move by the DGGI to demand back-taxes going back to 2017 has raised concerns about the sector's future. While the recently amended GST law increases the tax liability over three-folds, the fresh demands for past taxes could have a larger, negative impact on the viability of the sector.

The official stand is that this is a clarificatory measure, and that online games played for stakes have always attracted the same rate on valuation as betting/gambling activities. As such the demands are for past unpaid taxes and are not retrospective in nature.

Still, the total tax demand, which is likely over Rs 1 trillion, far exceeds the sector's revenues of around Rs 23,000 Crores. Indeed, the valuation of the entire online gaming sector is much less than the total cumulative demand, meaning the companies would not be able to pay the demands even if they were liquidated. The Government, on its part, has been encouraging the sector to flourish and grow with guardrails. Yet, there is no plausible scenario in which the tax demands can be met.

The industry points to several legal implications. The CGST and IGST Acts were amended during this year's Monsoon session of Parliament and became effective from 1st October 2023. The fact that the Parliament had to amend the laws, and so also the states many of whom issued ordinances, meant that a circular wasn't enough like it is in other matters where rate or taxable value needs to be clarified, a fact which will weigh heavily on the matter.

Second, there was always a lack of clarity on how to tax Online Skill Games. Companies have until recently paid 18 per cent GST on the platform fees, which is a fraction of the total money wagered in a game. This was seen as a loophole and the GST Council set up two different GoMs (Group of Ministers) to study the matter and make recommendations. The GoMs in turn held extensive deliberations over three years with the industry, think-tanks, civil society, and looked at various global precedents. It was at the end of that process the decision to tax online gaming at 28 per cent of player deposits was taken, prospectively from 1st October, 2023.

The achievements of GST tax authorities have no doubt been very laudatory, with new peaks every month. Yet their approach in conflating games of skill with games of chance in tax determinations would be put to a closer examination. Notably, in November 2023, the Madras High Court overturned for the second time the legislation that prohibited online real money games of skill like rummy and poker in Tamil Nadu. This ruling by the High Court reaffirmed the legal standing of online games of skill in India, effectively differentiating them from betting/gambling activities or games of chance. However, this matter was viewed differently in the GST Council.

Additionally, there is a variation between the tax calculation effective from 1st October, and that used to compute past dues. While the current law levies 28 per cent GST on player deposits from 1st October, the past demands levy 28 per cent GST on the full value of bets placed. Due to the nature of games, where the same Rupee is wagered multiple times, the latter scenario inflates tax liability by over 1,000 per cent. If the GST Council’s recent decision is a clarification, companies would argue how both regimes could have different tax treatments.

Regardless of which way one slices the issue, the true outcome of the current litigious situation may be critical for the sector. Its ability to grow, innovate, attract talent, and contribute meaningfully to the Trillion Dollar Digital Economy goal would depend upon the outcome. There are already some reports of companies shutting, jobs being axed, and talent fleeing to other sectors. Online Gaming has the potential to become a central pillar of Digital India; several states are striving to nurture the AVGC sector separately, and the real win-win would happen when this imbroglio is resolved, based on what is legally correct and finally sustainable.

As the Hon'ble Supreme Court considers and pronounces its verdict, the decision in itself will be more than a mere legal resolution, it would be a defining moment for the sector, setting the course for its future growth.

Dhanendra Kumar is formerly Executive Director at the World Bank for India, Sri Lanka, Bangladesh and Bhutan, First Chairman Competition Commission of India. He is currently Chairman of Competition Advisory Services LLP

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