The repercussions of increasing the tax levied on gaming companies go far beyond what meets the eye. It is not just a financial blow to a nascent and developing gaming industry. It could have a disastrous and irreversible impact on fostering cutting-edge technological capabilities, user experience and consumer welfare, generation of employment opportunities, incoming investments, and growth of the industry itself.
The representation to the Prime Minister’s Office was prompted by the Goods and Services Tax Council of India’s stance to increase the tax rate and impose the highest tax slab. Dubbed the ‘sin tax’, it will be levied upon the total money put in by users during gameplay, as opposed to the current practice of levying tax on the winnings collected by the users.
A sin tax is an excise tax specifically levied on certain goods deemed harmful to society, for instance, gambling, alcohol products, cigarettes, or horse racing. The sin tax is mainly levied for public health purposes to discourage the consumption of harmful products by making them unaffordable. The equitable treatment of online skill gaming, horse racing and gambling activities by the GST Council’s stance, is based on an erroneous interpretation of the law and is wholly inconsistent with previous judicial pronouncements and state policy.
The GST Council’s deliberations to impose a uniform rate of 28% on casinos, racecourses, and online gaming is not in line with the government’s steps towards creating an equal opportunity and conducive environment for the growth of the digital gaming ecosystem. This ecosystem is based on enabling users to play games of skill for real money, which is clearly distinguishable from any act of betting and gambling, which operates solely on chance. This distinction has its foundations in erstwhile statutes, and previous judicial pronouncements as well, making the GST Council’s stance all the more abhorrent.
The Constitution of India lists ‘betting’ and ‘gambling’ as state subjects, providing powers to the states to regulate the areas of gambling and betting. With the introduction of GST, taxes on entertainment and amusement were subsumed into the GST.
The terms ‘betting’ or ‘gambling’ have not been defined under the GST laws. However, these terms have been defined in Section 65B (15) of the Finance Act, 1994 as “putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”.
Moreover, the meaning of the terms ‘betting’ and ‘gambling’ has been provided in the case of M/s. Junglee Games India Pvt. Ltd. v. State of Tamil Nadu. The Hon’ble Madras High Court has held that these terms in Entry 34 of the Second List of Schedule 7 in the Constitution of India are limited to betting on activities based on chance only.
In addition, the Karnataka High Court in the case of All India Gaming Federation vs. The State of Karnataka & Ors, has also defined the terms ‘betting’ and ‘gambling’ as confined to games of chance. The definition of betting and gambling and the judicial interpretation given to these terms seems to restrict its applicability to cases where the winnings are merely on the occurrence of a chance or accident (i.e., a game of chance).
In view of the above, it is abundantly clear that a distinction has been made between gambling and gaming. Therefore Rule 31A of the CGST Rules, which applies to lottery, betting, gambling, and horse racing, cannot apply to online skill-based gaming platforms.
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