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Business News/ Technology / App News/  E-gaming firms worry claims in GST may cripple sector

E-gaming firms worry claims in GST may cripple sector

At present, GST on actionable claims is applied to lottery because lottery is part of the prize pool entirely

The proposed rules want to treat the prize pool as an actionable claim, and levy GST on that too. afpPremium
The proposed rules want to treat the prize pool as an actionable claim, and levy GST on that too. afp

India’s online gaming companies are worried that applying the actionable claims clause in the Goods and Services Tax Act (GST Act) on the industry will significantly raise its tax burden and cripple some of the smaller players, dealing a setback for the entire industry.

In many online games, including fantasy sports and skill-based betting games, users pay small amounts to enter a tournament or event. These amounts together form a prize pool for the event, from which the platform takes a commission.

At the moment, a GST of 18% is paid on that commission, whereas the proposed rules want to treat the prize pool as an actionable claim, and levy GST on that too.

According to the GST Act, an actionable claim is a claim to any debt, which is what the prize pool is being treated as in this case. However, platforms argue that the prize pool itself is not a debt for them.

“Actionable claims refer to liability to be paid depending upon who wins," said Ketan Godkhindi, chief strategy officer at Witzeal Technologies, a Gurugram-based gaming company.

He added that this is not the money owed by platforms. The pool is just held in a trust through an escrow account, and it becomes an actionable claim because it becomes a claim to be paid off the moment the winning happens.

"At present GST is applied only on actionable claims in case of lottery, betting and gambling where outcome is purely based on chance," said Godkhindi. In December 2020, the Supreme Court held that lottery, betting and gambling are actionable claims and fall under the definition of ‘goods’ under Section 2(52) of the Central GST Act, 2017.

“The fundamental difference here is between the game of skill and the game of chance," Godkhindi noted. Most real money gaming platforms that allow players to compete in games like ludo, rummy, carrom, or fantasy cricket have maintained that the games test participants’ skills and cannot be equated with gambling.

In 2015, the apex court recognized online rummy as a game of skill. The judgement has since then played a key role in changing the perception about skill gaming and the subsequent growth it has seen. It has also featured in cases against these platforms in states such as Karnataka and Rajasthan.

A November 2021 report by market research firm RedSeer projected a threefold growth in India’s gaming industry by 2026, touching a total size of $7 billion.

While the GST Council had deferred its decision on the matter to September during its meeting held last month, it is expected to change the tax rate from the current 18% to 28%.

“Though the gaming industry has largely accepted the proposal of a 28% GST, the issue lies with the way the tax is implemented," said Sameer Barde, chief executive of E-Gaming Federation, an industry body.

Gaming firms typically work with a commission rate of 7% to 20% and some even have margins as low as 4%, he said.

Jay Sayta, a lawyer who advises multiple online gaming firms, said levying GST on actionable claims could be problematic. “The overall prize pool is not something that gaming platforms retain, so being levied a tax on this value and not just the fee that constitutes its earning could leave no room for profitability," he said.

Industry experts warned that if the tax is applied to the entire prize pool, the increase in tax liability could be close to 100 times, killing businesses in the gaming sector.

If applied, the actionable claims cause could force platforms to levy very high charges on its users, which would force gamers towards other options — usually unregulated sources and informal platforms, which don’t pay any tax.

Sayta further said that other jurisdictions, such as the US, levy a federal tax of 0.25% on the total wagered amount, but the rate is low enough to not affect the industry. Some countries even provide tax concessions to gaming firms, though the real money gaming sector is usually not included in such concessions. He warned that some jurisdictions such as Kenya had attempted to levy a similar tax of 15% on gaming revenues, but this had impacted the industry in its potential to earn. “A similar impact could happen in India as well," he added.

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Abhijit Ahaskar
Abhijit writes on tech policy, gaming, security, AI, robotics, electronics and startups. He has been in the media industry for over 12 years.
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Published: 22 Jul 2022, 11:08 PM IST
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