GST on Online Gaming and Gambling: A Brief Overview

GST on Online Gaming

The world of online gaming and online gambling has grabbed the attention of millions of Indians, from heart-pounding fantasy leagues to card game showdowns. However, a question about how the Goods and Services Tax (GST) works in this digital environment arises along with its rising popularity. This article tries to ease the complexities of GST on online gaming and gambling using simple language and practical examples to walk you through the rules whether GST on online gaming or gambling covers and about the regulations.

The GST Council in their meeting has surrounded the ongoing discussion on GST on online gaming. GST on online games is impacting both developers and players. Notwithstanding the reservations, the imposition of GST on Online Gaming affects both supporters’ and opponents' views. 

There have been notable changes to the taxation in India pertaining to GST on online gaming and gambling, especially in relation to the differentiation between games of chance and games of skill. The taxation of entry fees, in-game purchases, winnings, and the handling of taxation of in-game currency, chips, and tokens have all come up for discussion in response to recent announcements from the GST council, including the implementation of a 28% GST rate starting in October 2023. 

Advance rulings and the Input Tax Credit (ITC) are now essential tools for managing the tax liability associated with GST online gaming. The need for clarity and an outlook for the future in this changing environment is highlighted by the Challenges faced by online gaming platforms. The future outlook of GST on online gaming continues to face maintaining compliance and comprehending the subtleties of GST regulations.

What Covers Online Gaming and Gambling?

Let us define the terms first before getting into the details. Online gaming includes a wide range of activities, such as chance-based games like online poker and rummy and skill-based competitions like fantasy sports. On the other hand, gambling mostly consists of games like roulette or slot machines where chance is a major factor. A significant decision affecting the online gaming industry, casinos, and horse racing enterprises was made at the 50th GST Council meeting, which took place on July 11, 2023.

Before the GST 50th Council meeting, GST on Online Gaming was a considerable debate. There has been much discussion on GST online gaming. The Argument was that GST on online games could be imposed or that GST on online games could stifle the industry growth. Online gaming GST opponents claimed that  GST on Online Gaming could revoke the industry expansion. In contrast, Online gaming GST supporters said that the implementation of GST on online games would ensure equitable taxation. Online gaming GST opponents said that the imposition of GST on online gaming will increase the costs of players and that led to reducing their purchasing power. While Online gaming GST supporters claimed  GST on Online Gaming will help the government generate revenue and help in public service.

Which Are the Prominent Players Covered by Online Gaming and Gambling Under GST?

A number of well-known companies are already operating in the online gaming and gambling industries, and they are protected by the government's 28% GST structure. which are listed below. 

Platforms for online gaming: 

Dream11, MPL, RummyCircle, PokerStars, and mobile gaming applications such as PUBG Mobile and Call of Duty Mobile are a few examples where GST on online gaming applies.

Publishers and developers of video games: 

Activision Blizzard, Electronic Arts (EA), Tencent Games, Ubisoft, and smaller independent developers are a few examples where GST on online games is applicable.

Payment gateways: 

Paytm, PhonePe, Razorpay, Google Pay, and international sites like Paypal are a few examples where GST online gaming if any, would be applied.

Players: 

People/ Individuals from a variety of backgrounds and interests who participate in online gaming or gambling then GST on online gaming or gambling would be applied.

Recent GST Council Announcements on Gaming and Gambling 

• Several Indian courts have heard challenges to the GST's application to gaming and betting. Below, we encapsulate some such rulings.

• The Supreme Court, in Skill Lotto Solutions Pvt Ltd. vs Union of India, maintained the constitutional validity of the GST imposed on lotteries, betting, and gambling.

• The GST Council, the highest authority overseeing GST, provided clarification on the taxation of internet gambling and gaming in July 2023. Key takeaways include:

• GST of 28% is uniformly applied to the total amount of bets, irrespective of the degree of skill or chance involved.

• To be clear, activities related to online gaming GST are classified as "actionable claims," which are subject to a 28% goods and services tax.

Game of Skills Vs Game of Chance

A game of skill is one in which the player's knowledge, experience, and skill determine the result rather than just random chance. Rummy and fantasy sports apps like Dream 11 are a couple of examples. This differentiation holds significance since skill games are eligible for a reduced tax rate.

On the other hand, games of chance are handled the same way as horse racing, betting, and gambling. As a result, they pay a higher GST rate as stipulated in Rule 31A of the CGST Rules, 2018. 

The GST regime currently distinguishes between online games played by skill and those played by luck. As per the 50th GST Council meeting's recommendation, 28% GST will be applied to the full face value of the product. Furthermore, since online gaming currently falls under actionable claims, the GST law will soon be amended to include it under its purview.

However, as the recent updates on the Gameskraft Technology case illustrate, there can be situations when it is difficult to distinguish between skill and chance. The tax authorities combined all of its games including rummy into chance-based games, which encouraged a higher GST tax rate.

Taxability of Online Gaming and Gambling under GST vis-a-vis Income Tax

Many people are addicted to the exciting world of online gaming and gambling, but GST on online gaming tax implications was uncleared on them. Do not worry; this article explains the two main taxes at play: income tax and the goods and services tax (GST). Put on your seatbelt and let us explore the game's rules!

How are transactions taxed under GST?

Consider GST to be the service tax that is applied to online gaming sites. It relates to the gross gaming revenue (GGR) of the platform, which is essentially the total amount of money bet by players less any winnings that are paid out. Consider paying an entry fee of Rs. 100 for an online poker game, of which Rs. 30 remains with the platform and Rs. 70 goes toward the prize pool. GST is applied to this Rs. 30 and is typically included in the admission price.

Recall the previous discussion on "Clarification on skill vs chance distinction"? All right, things are now more straightforward! Both skill-based and chance-based online gaming and gambling will be subject to a flat 28% GST applicable from October 2023. Thus, the GST on online gaming rate does not change whether you are playing a thrilling game of roulette or a strategic fantasy league.

How are transactions taxed under Income Tax?

Let us switch to income tax now. This covers any particular winnings you may have from online gambling or gaming. The key point is that income tax and GST are two different things. You as an individual need to pay income tax on your winnings separately, even though platforms pay GST on online games.

How do Wins Get Taxed?

Your winnings' tax treatment is contingent upon their quantity and frequency.

• Small Winnings (Up to Rs. 10,000): Usually, these are tax-free.  Good luck with that!

• Greater Winnings (Over Rs. 10,000): Section 115BB of the Income Tax Act levies a flat 30% tax on these winnings.

How is TDS deducted from such Winnings?

According to Section 194BA of the Income Tax Act, the platform will deduct 30% income tax at source (TDS) from winnings that exceed ₹10000 in a financial year. This helps you pay your taxes early and results in less money coming into your account initially. Recall that the 28% GST that the platform paid on their GGR is not included in this TDS.

How to Calculate GST on Online Gaming and Gambling?

MastersIndia’s GST Calculator has its best use for GST calculation. Let’s have a look at the calculation part of the following. 

A gaming website retains funds in two ways:

• an entrance or platform fee (often between 10% and 20%) to play the game.

• A percentage of the pot money is set aside as prize money. 

• Only the platform/rake fee will be charged at 18% for a game of skill. For example, let us say that ten rummy players want to wager Rs. 500, and the platform takes 10% as a fee. After that,

Suppose, 100 rupees is the platform fee.

Then, the Platform Charge will be: INR 100 * 10% * 10

Platform Fee * 18% = GST chargeable

Taxable GST = Rs. 100 * 18% 

Therefore, the GST on online games payable is Rs. 18. 

But for games of chance, there will be a 28% GST rate applied to the total gross value. Consequently, in the aforementioned example, the tax incidence rises to Rs. 28 when the earnings are treated like a casino wager or the game is viewed as a game of chance.

GST payable is equal to 100 * 28%.

Therefore, the GST on online games payable is Rs. 28. 

Rate of GST for Online Gaming and Gambling 

Because it complicated tax calculations, the final GoM proposed doing away with the distinction between GST on online games that are classified as skill-based and those that are chance-based. Rather, it offered the following suggestions:

• All online games, including skill games, will have a flat 28% GST rate. Moreover, this rate will be based on "gross revenue," which means the entire stake value rather than just the platform fee paid.

• A flat rate of 28% will be applied to the total amount of chips purchased by casinos at the time of entry. On wagers placed during multiple rounds, including wagers using prior round winnings, GST is not applicable.

After considering all the suggestions now the rate of GST is flat at 28% on both the game of skills and the game of chance.

Input Tax Credit Claims for Service Providers 

A registered tax person may claim input tax credit (ITC) on goods and services used to further the business, in accordance with Section 16(1) of the CGST Act. Nevertheless, there are certain limitations on when ITC can not be claimed under Section 17(5) of the CGST Act, which is thoroughly explained. 

As per section 17(5) explanations, taxes paid on their purchases, service providers who are directly involved in GST on gaming and gambling are not eligible to claim the Input Tax Credit (ITC). 

Which Platforms and Services Not Covered under Online Gaming under GST?

GST is not applied to platforms that offer free-to-play games without requiring payments. Additionally, Gambling does not apply to tournaments where prizes are predetermined or awarded based on performance. There are a few examples of such players are not covered under GST on gaming as under.

Free-to-play games: 

Consider light-hearted mobile titles that allow you to advance without having to pay real money, like Candy Crush or Angry Birds.

The League of Legends World Championship:

The League of Legends World Championship is an example of an esports competition where competitors compete for pre-determined prize pools based on skill rather than luck.

Achievement-based rewards: 

Take into consideration video games such as Fortnite or PlayerUnknown's Battlegrounds Mobile, where players can earn cosmetics or other non-monetary rewards by completing challenges or winning matches in-game. 

Advance Rulings on Online Gaming and Gambling

• A common objective of online gaming GST and taxing GST on online games was a key point of the meeting. Achieving a balance between the taxation of GST on online games and promoting the online gaming GST system should be a goal shared by all stakeholders. 

• The Bombay High Court held in Gurdeep Singh Sachar v. Union of India and Ors that the GST only applies to the consideration received for the provision of goods or services on the platform, not the player's entire deposit. 

• Similarly, the Supreme Court of India (SC) determined that Dream 11 was a game of skill and that games of this nature are not covered by the Public Gambling Act in Varun Gumber v. Union Territory of Chandigarh and Ors.

• Additionally, in Skill Lotto Solutions Pvt Ltd. v. Union of India, the Supreme Court affirmed the constitutional validity of the GST laws pertaining to lotteries, betting, and gambling.

Conclusion

GST on online gaming in India has been expanding rapidly since the Financial year 2022, revenues are predicted to reach Rs. 29,000 crores. However, its chances have been hurt by the uncertainty and hesitancy surrounding the application of GST on online games to internet gambling and casinos. Unfortunately, classifying the GST online gaming industry in the same category as gambling may have an impact on its rapidly growing sector. All in all, GST on online Gaming have a positive impact on all the stakeholders including payers and GST online games companies.

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