It has been widely reported that the GST department has issued show cause/demand notices to several online skill gaming companies demanding astronomical sums of GST (many of which demands are individually more than the entire industry size) for the past period. This action of the GST department has once again brought back the spectre of Vodafone and retrospective taxation. While technically, these demands are not “retrospective”, in the sense that they are not based on application of a newly made law to past periods, their impact is no less draconian. Neither does it show the Ministry of Finance and its policy-making abilities in a poorer light than it did during the sordid Vodafone saga.
One may recall that earlier (i.e. before the recent amendment), the GST department had tried to classify online skill gaming platforms (such as Gameskraft, My Team 11 etc.) as “betting and gambling” under the extant GST laws and had issued demand notices applying 28% on the entire face value of amounts placed. The department argued that the age-old distinction of games of skill and games of chance hold no significance and if played for monetary stakes, amount to “betting and gambling” under the law. These arguments made by the GST department, however, did not find favour with the Courts and the demand of Rs. 21,000 crores made on Gameskraft was quashed by the Karnataka High Court. The Karnataka High Court, correctly relying on past judgments of the Supreme Court, held that one cannot view the skill gaming platforms with the same lens as that of a betting or gambling business (which necessarily involves putting monetary stakes on games of chance) and hence those cannot be taxed as gambling under the then extant GST laws.
It may also be noted that the Karnataka High Court does not stand alone in this matter and there is a judicial accord on this point. The show cause notice issued to another skill gaming company, My Team 11, was also stayed. In fact, in the MyTeam 11 stay order, the Rajasthan High Court, after reviewing the jurisprudence on the matter, scathingly remarked that the GST department’s action of issuing the show-cause notice was, in itself, an abuse of process of law.
Against this backdrop, after the recommendations (which took four long years of deliberations) made by the 50th and 51st GST Council, the Central Government has now levied 28% GST on entry deposits made by an online skill game player. It is pertinent to note that the Parliament has, now for the first time, introduced the phrases “online gaming” and “online money gaming” in GST laws, and the levy of the tax is not on the full face value (as was demanded in the cases mentioned above) but on the deposit. The amendment also does away with the distinctions between games of skill and chance. The changes brought about by the amendments are numerous and substantial and therefore in spite of protestations made by senior Ministry of Finance officials, this amendment is not “clarificatory” in nature. It is simply a new law and seeks to tax online gaming in a manner that was never envisaged prior to the passing of this legislation.
The amendment seems to make an attempt to overcome the judicial pronouncements that hold that games of skill when played for monetary stakes cannot be equated with betting and gambling.
By several estimates, this new law increases the GST applicable to online skill gaming by over 400%. Curiously, the new law benefits the pure gambling industry. As set out above, under the older regime, the pure gambling industry was required to discharge GST at the rate of 28% on the full face value of bets, now under the amended law, the rate will be applied on entry deposits and hence would bring down their GST liability substantially. This action is baffling to say the least. From a public policy perspective, what is sought to be achieved by providing a fillip to the gambling industry at the cost of a homegrown skilled gaming industry? Unfortunately, there are no answers. Senior government officials talked about moral issues being the rationale for introducing the 28% GST on the online skill gaming industry, however, given the above, that certainly could not have been the rationale.
The impact of the amendment is already being felt with several major companies (such as MPL) already laying off hundreds of employees or paring down their profitability forecast (Dream11) and smaller companies (like Quizzy) shutting entire operations. The decision will very likely lead to the emergence of an oligopolistic market, with high barriers to entry and fewer choices for users.
To make matters worse, the GST department has challenged the Karnataka High Court verdict in the Supreme Court and at this point of time, the said order has been stayed by the Hon’ble Supreme Court, while it hears the matter. The stay has emboldened the GST department to issue a spate of show-cause notices on online skill gaming firms.
From a technical perspective, online skill gaming firms ought to prevail in the Supreme Court. The GST department’s argument that even games of skill played for monetary stakes amount to gambling under law, does not really hold any water. The Supreme Court has time and again, and that too in the context of games of skill being played for monetary stakes, held that such activities do not amount to betting and gambling under our laws. In fact, there are numerous legislations across Indian states that prohibit gambling activities, but each of them carve out an exception for games of skill. This position of law distinguishing between games of skill and chance is not even recent, the jurisprudence dates back to more than 100 years. Surely, jurists across generations would not have made the same mistake over and over again. In reality, there exists no substantial question law today on this aspect, that the Supreme Court needs to answer.
From a tax policy perspective, the appeal and its intent is not clear. The GST department has raised demands that (even in the unlikeliest scenario of them prevailing in the Supreme Court) can never be fulfilled. Individual demands exceed the entire revenue of the industry. In layman’s terms, the GST department has sought, not to raise demand on the revenue of the online skill gaming firms, but on the monies that flow through their system, monies on which these firms have no right. It is akin to asking a stock broking firm to pay GST on the entire value of amounts invested through their platform, rather than on the service fee charged by them to facilitate such trades. The very notion, from a tax policy perspective, is baffling.