This is a guest post by Pallav Pradyumn Narang, a Delhi-based Tax and Regulatory Partner at CNK, an accounting, tax and advisory firm.
That skill-based gaming companies have regulatory challenges every now and then is not a new story. There are however persistent issues and new developments with respect to the tax landscape that governs all businesses in India, including online games of skill.
In the recent past the sector has attracted investments, players, and with that even more regulatory scrutiny. We have tried to address some of the more burning issues in this article.
Unfortunately, despite the size of the skill-based gaming industry in India, skill based games do not have their own SAC (Services Accounting Codes) allocated to them.
The department on its part has made several attempts to classify online skill based games under the bracket of this effort has been aided by the SAC description for Gambling and betting services which says , “Gambling and betting services including similar online services” not keeping in mind clear cut precedents set by the courts which have clearly excluded skill based games from the domain of gambling.
The result of tax officers trying to throw everything at the wall and seeing what sticks and using “similar online services” is a needless controversy over the classification of skill-based games and the rate applicable to such games. Thankfully, thanks to settled cases, better sense has prevailed in recent times and cases of such mis-interpretation have all but disappeared.
May 20, 2017 – GST council announces 28% tax on casinos and betting; 18% tax likely on skill games; lottery tax yet to be announced
Taxability of Advances
The moment in time at which GST on revenues earned by the operator has to be paid by the operator is determined by what is called the time of supply. Under the current provisions of the GST law time of supply of services shall be either of:
- Date of issue of invoice
- Date of receipt of payment
- Date of provision of service
Whichever is earlier.
Online real money skill-based games work by allowing their customers to deposit money upfront which the players can then utilize to them play games on the platform. Treating this money as an advance can have the adverse impact of subjecting the entire amount received as taxable at the time of receipt of such payments.
A view has also been taken by the department to allege that since the advances received from players will all result in eventual income for the operator the operator should discharge liability at the time of receipt of such advances. Careful structuring of flows within the operator’s system and an understanding of the relevant provisions is critical to avoid unnecessary tax litigation on this matter.
Value of Services subject to tax
The taxable component under GST is the consideration received by the service provider, in this case the operator of the skill-based games. Consideration can be defined as in simple terms as:
- Any payment made, or to be made
- In money or otherwise
- In respect of, in response to or for the inducement of supply of goods or services
Consideration for services, particularly in the case of skill-based games that require an entry fee, ticket, or upfront payment of a similar nature, represents a significant grey area where there is enormous potential for tax disputes and prolonged litigation if preventive measures are not taken. This is because the definition includes all payments made or to be made for the inducement of supply of goods or services.
With this definition, a view can be taken to impose taxes upon the entire payment received regardless of the eventual sums charged by the operator and therefore presents a huge challenge to for money gaming operators.
To give you an example, if an online IPL fantasy game requires the player to pay 500 rupees to enter a prize game then as per the provisions the entire sum can be subjected to GST even though the monies may in fact be flowing into the prize pool. Given that operators earn only a small margin of entry fee, subjecting the entire amount to GST eviscerates the revenue model.
Under the service tax regime, a stand could have been taken that the entry fee charged in the example above was analogous to an actionable claim in the manner of lotteries etc. and therefore was out of the purview of taxation under the previous regime. Under GST however lotteries, betting, and gambling are not only subject to GST but as discussed earlier they are subject to the highest possible rate of 28%. The challenges therefore for this nascent but emerging industry are not likely to end soon.
Further, non -resident operators of skill-based games have to contend with registration and payment of GST under the rules for Nonresident registered taxpayers which carry with them a different set of issues such as pre-payment of taxes, interplay with direct taxes etc.
April 29, 2019 – Online skill gaming companies face questions about manner of GST payments
In the realm of Direct taxes
Issues raised under GST are now also going to give sleepless nights to operators under the direct taxation realm. Due to exchange of information by the GST and direct tax departments what is reported to peter also gets known to Paul and therefore if lets say GST were to be imposed on the full entry fee then not reporting the same revenues under direct taxes could land the operator in the regulatory spotlight.
The biggest challenge from a direct tax perspective is posed by the nuances of Section 194B of the Income Tax Act, 1961 prescribes the method and quantum of tax deduction on winnings from skill-based games.
Since key terms such as “winnings” and “game” have not been defined in the charging law there exist many opinions as well as judicial decisions pointing in differing directions with respect to the correct application of the law on withholding of taxes on winnings from such skill-based games.
In the absence of any clarifications from the government this regulatory fog will continue to hang around the entire skill-based gaming industry for a while.
The views expressed in this article are that of the author alone and are not necessarily endorsed by this website.