In a recent interaction, John Joseph, former chairman of the Central Board of Indirect Taxes and Customs (CBIC) and currently Strategic Adviser with DeepStrat, shared critical insights regarding the evolving landscape of GST regulations within the online gaming industry. Amidst the ongoing discussions and debates surrounding the retrospective and prospective implementation of the new amendments, Mr. Joseph emphasized the crucial need for legal certainty and clarity from the government and the GST Council. Shedding light on the impact of these amendments, he highlighted the industry's prior taxation practices and addressed the substantial changes brought forth by the recent amendments, offering a comprehensive analysis of their implications. Here are the excerpts of the interview:
1) Do you think the government needs to issue clarification regarding GST on online gaming, casinosand horse racing?
It is important for the government and the GST Council to provide legal certainty on the matter, especially for the industry, investors, and its many employees. The minutes of meetings of the GST Council and the notifications which brought about the recent amendments to the GST Acts do not talk of any retrospective application. It is for the Council to use the guidance/clarificatory statements as an effective tool to communicate its intention to the field officers and restore legal certainty in the interests of the economy and meet revenue objectives which served as the bedrock for the decision taken by the GST Council.
The intent of the GST Council, which has been discussing the valuation of online gaming since 2019 was to increase the effective rate of taxation on this new age industry. The industry wide practice adopted was to pay GST on their platform fee/ commission. There are numerous instances of such clarifications earlier when trade practice adopted was different due to lack of clarity in the GST laws.
2. Many experts claim that online gaming companies are receiving tax notices related to previous years despite Finance Mimister Nirmala Sitharaman stating categorically in Parliament in December that the new rules would be made prospective. What would be the impact of retrospective implementation of the new amendments on these companies? Additionally, could you compare the impact if it is done prospectively?
On the recommendation of the GST Council, the government has amended the GST Acts with effect from 1st October 2023. These amendments essentially have done four things – (1) introduced specific definition of “online money gaming”, (2) fixed rate of tax at 28% and (3) the taxable value i.e., the value on which 28% tax rate will be imposed is deemed to be the full value of deposit made into the wallet (4) included online gaming in ‘specified actionable claims’, which are taxable. It is also important to note that prior to the amendments actionable claims for games not in the nature of gambling, betting were not taxable.
These amendments are applicable prospectively from 01.10.2023. The minutes of the meetings and the Press Releases of the GST Council also suggest that the recommendation of the Council was to enforce the new tax regime of 28% prospectively.
However, it appears that Central authorities have issued notices demanding GST at 28% on the prize pool from 01.07.2017 – thereby interpreting that the said amendments on taxing actionable claims in online gaming retrospectively.
If we were to say that the amendments were applicable retrospectively then it would give rise to tax demands running into lakhs of crores of rupees and defeat the intent of the GST Council as the platforms lack the ability to pay & legal certainty that the government had brought in for the smooth functioning of the industry and the economywill be redundant.
3. What were the previous taxation practices? Can you please explain the tax rates at which these companies were operating?
Earlier, three important things were different. One “online money gaming” was not explicitly defined in the GST Act. Two, actionable claims not in the nature of gambling, betting were exempt from GST. Three, online gaming was covered as services under OIDAR category. Therefore online gaming companies which were not in nature of gambling, betting , were paying 18% GST on the platform fee alone. So let us say a customer deposits INR 500 on a platform & joined a game of INR 100 where INR10 was the platform service. Then the company would pay GST at 18% on such INR 10 i.e., INR 1.8. Due to multiple redeployments the tax collected was in the range of 6-8% of the deposit i.e Rs 30-48. The GST was payable every time the customer joined a new game. But after the amendment, the entire deposit of INR 500 will be subject to tax at 28% i.e., GST would be 140 Rs in this case.
4. What is your assessment of the impact of new amendments on the online gaming companies?
The online gaming industry has emerged as an exciting new business globally and Indian policy makers are aptly and swiftly responding to the challenges of administering this emerging beast. The GST Council deliberated the taxing models and amended the GST Act and introduced specific definition of “online money gaming” and laid out that they will be taxed at 28% on the full value of deposit with effect from 1st October 2023. So, in my assessment, there has been legal certainty after the amendment. If the government and GST Council can issue a clarification on the prospective applicability of the amendment, the legal certainty will be upheld. I think that is very important for the industry and the revenue department for it to be able to meet its goals from this change in the GST regime.
The amendment has definitely increased the tax burden on the online gaming companies. If we were to compare with the international practice, then taxing the full deposit is not in line with what most countries practice. But that is a policy call and it would be prudent for the Council to also review the impact of such measures on the economic health of the industry in due course and consider revisiting the decision.