It was an issue which was always under blanket of confusion. No one including industry and Department was very much clear about the tax treatment of Online Games played through platforms. More so, it became talk of town when Department issued SCN of more than Rs. Rs.20,000 Crores (Twenty Thousand Crores) against Gameskraft considering online games as Actionable claims (lottery/betting) . However, the same was struck down by the Hon'ble High Court considering Rummy as a skill of Game. Moreover, Department has filed SLP with the Hon'ble Supreme Court against the decision of High Court.
Thereafter, GST Council decided to impose GST on Online games at 28% and recommended to make changes in GST Laws to remove any confusion which was carried out in the monsoon season.
In this article, we will do comprehensive analysis of GST Treatment of Online Games both before amendment and post amendment.
In this article, following areas will be covered
A. Situation before Amendments and Key Points of Judgement
As per definition of Goods as defined in Section 2(52), Goods includes Actionable Claims. However, as per Entry 6 of Schedule III, Actionable claims other than Lottery, betting and gambling are outside the preview of GST.
SCHEDULE III (Activities or Transactions Which Shall Be Treated Neither As A Supply of Goods Nor A Supply of Services) 6. Actionable claims, other than lottery, betting and gambling. |
However, now main moot question was whether Online games like Rummy which are mainly/substantially are game of skills nor chance, whether played with/without stakes (bet), will tantamount to “ gambling or betting” as contemplated in Entry 6 of Schedule III of CGST Act, 2017.
Now we will discuss, Brief Facts of the Case:
Brief Facts of the Case:
Games Kraft (GTPL) is an intermediary having technology platform which allows users to play skill based games against each other. So GTPL was discharging GST on facilitation fee which it charged from the players. For instance, A&B both downloaded the app and put stake of Rs. 200 for game of Rummy. At the start, both players will deposit Rs. 200 each with the GTPL. After the Game, winner will receive 360 from GTPL. GTPL charges Rs. 40 as facilitation fee on which it was discharging GST considering it as a service. GTPL claimed that on this Rs.360 it has no right/lien and also keeps this amount in separate designated account (held as in “trust”) and just transfers this amount to the winner after the game.
Department alleged that GTPL is involved in betting/lottery, accordingly, he is supplying goods (actionable claims) and not a service. Accordingly, they are required to pay GST at 28% on full value of Goods i.e. Rs. 400 in terms of Rule 31A of CGST Rule, 2017.
Key Points of Judgement (including Petitioner Submissions)
Skill of Games does not get covered into lottery & betting. Only Games of Chance are covered in scope of Lottery & betting.
The main test to determine whether a game amounts to gambling or not is, what dominates/preponderates, whether skill or chance. Test of Predominance, i.e. Game of Skill means proportion of skills is more than chance does not specially means 100% skills
Games of chance are those where the winner is predominantly determined by luck; the result of the game is entirely uncertain and a person is unable to influence such result by his mental or physical skill.
Whether it is Offline or virtual does not make any difference.
Further, Competitions involving substantial skill or predominately skill is “business activities” that stand protected under Article 19(1)(g) of the Constitution.
Accordingly, it has been held that Rummy is preponderantly a game of skill and not of chance. The Court further observed that, "it requires certain amount of skill because the fall of the cards has to be memorised and the building up of rummy requires considerable skill in holding and discarding cards". The expression 'mere skill' means presence of skill of a substantial degree. Therefore, it can not be considered as "lottery or betting". Accordingly, SCN of the Department was struck down.
However, Department has filed appeal in the Hon'ble Supreme Court against the Decision of the High Court.
B.Situation After Amendment
For imposing GST on online Games & other items, apart from other amendments, Schedule VI has been amended and instead of "lottery, betting and gambling", now Specified Actionable Claims has been made taxable. Specified actionable claims has been defined in Section 2(102A) which means (i) betting; (ii) casinos; (iii) gambling; (iv) horse racing; (v) lottery; or (vi) online money gaming;’;
Therefore, from date of enforcement, Online money Gaming where money is involved whether it is based on skill or chance will be taxable. Further, the Platform who is arranging such games will be required to pay GST as they have been made supplier of such games by making changes in definition of Supplier in Section 2(105). Further, to remove any confusion, it has been clarified that GST needs to be paid even if such games are permissible or not. Moreover, where payment is made in virtual digital assets instead of money as defined in Income Tax Act has also been covered.
Furthermore, by making necessary amendments in IGST Act, even if such platform is based out of India (to protect domestic industry), it will be required to take Compulsory Registration in India and need to discharge GST. in case he fails to comply, access to such platform can be blocked. (Legal Text has been provided in end of the article)
Note: The above changes shall come into force on such date as the Central Government may, by notification in the Official Gazette. Most probably it will come into force from 01.10.2023.
C. Valuation Issue
For Value on which GST needs to be discharged, it has been recommended by the GST Council and incorporated in Rule 31B, that it will be paid on the value deposited/paid by the players to the platforms (excluding the amount entered into games/ bets out of winnings of previous games/ bets). For instance, Two Players (A&B) deposited Rs. 2000 each for Rummy Game and in the game Player A wins and again bet the winning amount i.e. Rs.3,600 (4000-commission of Platform) on another game. In this case, GST will be discharged on Rs. 4,000 not on Rs.7600. Further, it has been clarified in the Rules that, GST has to be discharged on Value of Original Deposits even if the same is refunded/returned later on to the player.
D. Discussion about Amendments
Through Amendment in CGST & IGST Act during Monsoon session, following changes have been made regarding online games:
New definitions of Online Games, Online Money Gaming, specified actionable claims, virtual digital assets
Changes in definition of supplier, Registration Requirements, Entry No. 6 of Schedule-III.
Changes in CGST Act
New Sections
Section 2 (80A): "online gaming" means offering of a game on the internet or an electronic network and includes online money gaming;
Section 2(80B): "online money gaming" means online gaming in which players pay or deposit money or money's worth, including virtual digital assets, in the expectation of winning money or money's worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both and whether the same is permissible or otherwise under any other law for the time being in force;’
Section 2(102A): "specified actionable claim" means the actionable claim involved in or by way of—
(i) betting;
(ii) casinos;
(iii) gambling;
(iv) horse racing;
(v) lottery; or
(vi) online money gaming;’;
Section 2(117A): "virtual digital asset" shall have the same meaning as assigned to it in clause (47A) of section 2 of the Income-tax Act, 1961
Changes in definition of Supplier
Original
Section 2(105): ―supplier in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied;
Addition;
"Provided that a person who organises or arranges, directly or indirectly, supply of specified actionable claims, including a person who owns, operates or manages digital or electronic platform for such supply, shall be deemed to be a supplier of such actionable claims, whether such actionable claims are supplied by him or through him and whether consideration in money or money's worth, including virtual digital assets, for supply of such actionable claims is paid or conveyed to him or through him or placed at his disposal in any manner, and all the provisions of this Act shall apply to such supplier of specified actionable claims, as if he is the supplier liable to pay the tax in relation to the supply of such actionable claims;";
Addition to Section 24 related to Compulsory Registration:
"(xia) every person supplying online money gaming from a place outside India to a person in India;”
Changes in Schedule III
In Schedule III, in paragraph 6, for the words "lottery, betting and gambling" the words "specified actionable claims" has been substituted.
Valuation Issue: Rule 31B has been notified vide Notification No. 45/2023 – Central Tax dated 6th September, 2023.
“31B. Value of supply in case of online gaming including online money gaming.– Notwithstanding anything contained in this chapter, the value of supply of online gaming, including supply of actionable claims involved in online money gaming, shall be the total amount paid or payable to or deposited with the supplier by way of money or money’s worth, including virtual digital assets, by or on behalf of the player: Provided that any amount returned or refunded by the supplier to the player for any reasons whatsoever, including player not using the amount paid or deposited with the supplier for participating in any event, shall not be deductible from the value of supply of online money gaming.
Explanation.- For the purpose of rule 31B and rule 31C, any amount received by the player by winning any event, including game, scheme, competition or any other activity or process, which is used for playing by the said player in a further event without withdrawing, shall not be considered as the amount paid to or deposited with the supplier by or on behalf of the said player.”
Changes in IGST Act
New Sections
In section 10 of the principal Act (related to place of supply of goods other than supply of goods imported into, or exported from India) , in sub-section (1), after clause (c), the following clause has been inserted, namely:—
"(ca) where the supply of goods is made to a person other than a registered person, the place of supply shall, notwithstanding anything contrary contained in clause (a) or clause (c), be the location as per the address of the said person recorded in the invoice issued in respect of the said supply and the location of the supplier where the address of the said person is not recorded in the invoice.
Explanation.—For the purposes of this clause, recording of the name of the State of the said person in the invoice shall be deemed to be the recording of the address of the said person;".
Section 14A:
"14A. (1) A supplier of online money gaming as defined in clause (80B) of section 2 of the Central Goods and Service Tax Act, 2017, not located in the taxable territory, shall in respect of the supply of online money gaming by him to a person in the taxable territory, be liable to pay integrated tax on such supply.
(2) For the purposes of complying with provisions of sub section (1), the supplier of online money gaming shall obtain a single registration under the Simplified Registration Scheme referred to in sub-section (2) of section 14 of this Act:
Provided that any person located in the taxable territory representing such supplier for any purpose in the taxable territory shall get registered and pay the integrated tax on behalf of the supplier:
Provided further that if such supplier does not have a physical presence or does not have a representative for any purpose in the taxable territory, he shall appoint a person in the taxable territory for the purpose of paying integrated tax and such person shall be liable for payment of such tax.
(3) In case of failure to comply with provisions of sub section (1) or sub section (2) by the supplier of the online money gaming or a person appointed by such supplier or both, notwithstanding anything contained in section 69A of the Information Technology Act, 2000, any information generated, transmitted, received or hosted in any computer resource used for supply of online money gaming by such supplier shall be liable to be blocked for access by the public in such manner as specified in the said Act.".
Changes in Act
In section 2 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the principal Act), in clause (17), for sub-clause (vii), the following sub-clause shall be substituted, namely:—
"(vii) online gaming, excluding the online money gaming as defined in clause (80B) of section 2 of the Central Goods and Services Tax Act, 2017;".
3. In section 5 of the principal Act, in sub-section (1), in the proviso, after the words "integrated tax on goods" the words "other than the goods as may be notified by the Government on the recommendations of the Council" has been inserted.
As in normal course as provided in Section 5, Custom Duty is paid on import of Goods, and since actionable claims is goods but custom duty is not payable, necessary changes have been made in Section 5 of IGST Act.
E. What will happen to Past Cases
As per source and interviews of senior officials, it is being decided that Department will act only after the decision of the Hon'ble Supreme Court in the matter for the past cases.
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Disclaimer: We have taken due care while explaining the provisions surrounding the issue, however, Fab Gyan and its Team will not be responsible for any mistake.