The pandemic saw a huge spurt in the popularity of online games. While some of them are games of chance, many are games of skill. This includes crossword puzzles, bridge, rummy, poker, scrabble and other games that require application of mind and an element of skill. The law has always frowned upon gambling and the Supreme Court has held it to be res extra commercium. At the same time, courts have repeatedly held that money involved in the playing of a game of skill would not amount to gambling.

The distinction between a game of chance and a game of skill has been maintained for over 150 years. The Public Gambling Act, 1867 expressly excluded games of skill from the purview of the expression “gambling”. Section 12 of this vintage law stated: “Nothing in the foregoing provisions of this Act contained shall be held to apply to any game of mere skill wherever played.”

While several old laws were repealed, this one continues to be in force. Therefore, Parliament has maintained the distinction between the two categories of games and has continued to hold that games of “mere skill wherever played” will not amount to gambling.

Recently, the Ministry of Electronics and Information Technology has come up with a draft notification to regulate online games. While there is no problem in regulating online games of skill, it would be impermissible to treat games of skill as amounting to gambling either in the rules or in the notification as this would be contrary to the Public Gambling Act, 1867.

Indeed, a serious controversy arose as to whether horse racing was a gambling activity. In a detailed judgment, the Supreme Court held that horse racing was a game of skill and could not be treated as gambling. The repeated attempt is to treat all games where any winning is involved as a pernicious activity, to be taxed as harshly as possible. The same moral dilemma seems to plague the Group of Ministers in deciding whether online games should be subject to tax at the highest rate of 28 per cent on the entire collection or only on the platform fee charged by the gaming company.

If a person pays Rs 1,000 for playing a game of skill such as bridge or rummy, Rs 100 is deducted as the service charge or platform fee of the company that conducts the game and the balance of Rs 900 goes into the winner pool. If 10 persons play such a game, the gross collection of the online gaming company is Rs 10,000 and its fee is Rs 1,000; the balance of Rs 9,000 is then shared by the winners. The question is whether the levy of 28 per cent will be on Rs 10,000 or Rs 1,000, which is the service consideration for the supply of online gaming services under the GST regime.

It is submitted that it would be extremely unwise to levy GST at 28 per cent on the gross amount. First, the consideration for the supply of online gaming service is only Rs 1,000 and not the entire amount of Rs 10,000. Secondly, the levy of 28 per cent GST on the entire amount, which is collected by the gaming company, would drive the entire industry underground and create a black market. Thirdly, the popularity of online games cannot be discounted and no amount of moral sermonising is going to prevent people from playing online games. Unlike horse racing, online games are played through servers and electronic equipment that can be located anywhere in the world. It would then lead to unnecessary investigative activity on the part of the GST authorities. It is also possible that many online games in India will shut down and the business will go overseas.

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The net result will be lower tax revenue and large-scale unemployment. It is often forgotten that section 194B of the Income-tax Act requires tax deduction of 30 per cent if the winnings are more than Rs 10,000. Thus, the winnings in excess of Rs 10,000 are already subject to a whopping 30 per cent TDS and this is remitted to the government. It is then for the assessee to adjust such deduction against his other tax liability or claim refund if he is not a tax assessee. The fact remains that 30 per cent is already collected at source. This keeps the activity legitimate and subject to supervision and control not only by the GST authorities but also by the Income-tax Department. If there is going to be TDS on 30 per cent and a further GST at 28 per cent on the winnings, it will be the death of the online gaming industry.

It is economically unwise to look at online games from a purely GST perspective. One has to look at the industry as a whole and ascertain the total tax collection that will result if the GST is at 28 per cent only on the service portion. The employment potential of online games must also be examined. Levying GST at 28 per cent on the gross amount would not only kill the online gaming industry but lead to a serious drop in collection of both GST and income-tax apart from resulting in unemployment. History teaches us that higher the taxes, lower is the collection; a lesson that must not be ignored.