New Delhi, June 07, 2023: Lakshmikumaran & Sridharan Attorneys,one of India’s leading law firms, has launched a report analysing the recommendations of the Group of Ministers (GoM) on GST on Online Gaming. The report comes in the backdrop of the Hon’ble Union Finance Minister’s remarks at an event in South Korea that the GST Council is deliberating taxation on online gaming and once there is certainty on taxation, the sector is expected to attract more investments.

The GST Council formed a Group of Ministers (GoM) to decide the applicability of GST on the online gaming sector. In June 2022, the report by the GoM recommended taxing the sector at the rate of 28% on the full value of the contest entry amount. In February 2023, the amendment to MeitY’s intermediary guidelines and The Income Tax Act, 1961 via Finance Act, 2023 for the online gaming industry, recognised the immense potential of the online gaming industry. The recent judgement of Hon’ble Karnataka High Court in Gameskraft reiterated the above legal position in relation to online games of skill.

GoM Report on Online Gaming

According to the analysis in the report, the first GoM Report on Online Gaming appears to be a deviation from the laid down judicial principles and the recognition of legal status of online games approved under the IT Rules. The report highlights the implications of various new developments related to legal status and taxation of Online Gaming in the last six months i.e the IT Rules and changes to TDS on winnings from online gaming.

The report further highlights the difference in legal status between online gaming and betting, gambling, and lottery. Online skill gaming has been held to be legitimate business activity protected under Article 19(1)(g) of the constitution by various courts, whereas betting/ gambling/ lottery are res extra commercium activities.   The report suggests that the proposed taxation position must be re-aligned to be based on Gross Gaming Revenue (GGR) instead of the total amount. The report also highlights global best practices and states that most mature and developed nations have capped the tax rates between 15-20% on GGR as it results in the highest tax revenue generation.

Key recommendations of the report:

●        The first GoM report should be re-examined to reflect the legal and factual analysis as per new laws and existing Jurisprudence.

●        Taxability on online games of skill may be decided considering the jurisprudence developed since the 1950’s wherein these games have been recognized as games of skills distinct from lottery, betting, gambling and wagering.

●        Certification of ‘permissible online real money game’ under the Information Technology Act and Information Technology Rules, provides a clear and distinct legal status to online gaming. Permissible Online Real Money Games under IT rules to be continued to be taxed on Gross Gaming Revenue.

●        In order to determine the applicability of GST i.e on Platform Fee (GGR) or on Total amount under the GST law, it has to be factually established whether the online gaming format is a game of skill or game of chance i.e wagering on an outcome. This distinction would be derived from the certification of online games by the Self-Regulatory Body to be recognised by the Government of India.

Commenting on the launch of the report, Mr. L. Badri Narayanan, Executive Partner, LKS said, 

“As per reports, the size of India’s gaming market is estimated at around US$ 2.6 billion in FY22. This is expected to reach US$ 8.6 billion by FY27. Realisation of this potential is subject to a fair & certain taxation framework. The GST Council should consider the factual legal position, expectations of the industry and implement global best practices to provide a conducive taxation regime and not levy heavy 28% GST on the total value of consideration.”

As our country aims to become a US $ 5 Trillion economy by 2030, driven by digitization, the time is opportune for India to come up with a transparent and viable taxation regime for the online gaming sector which is in tandem with global best practices. This will help in achieving the broad agreement that the mechanism of valuation should be simple and easy to calculate, in conformity with law, and at the same time aid in the progressive growth of the industry.