Online Gaming: Segregate Amount Collected By Portals For Taxation, Suggests New Proposal

Even as the Goods and Services Tax (GST) Council continues to struggle to arrive at a consensus over the issue of rate of taxation for the online gaming sector, a Group of Ministers (GoM) is considering a proposal to segregate the amount collected by online gaming portals into two accounts­—service and escrow. According to the proposal, the service account should attract the GST rate of 28 per cent, while the money in the escrow account could attract a tax deducted at source (TDS) of 30 per cent under the direct tax rules.

The proposal comes as a prospective solution to the issue raised by the online gaming industry against the earlier recommendation of the GoM that would have imposed 28 per cent tax on the entire amount collected by gaming platforms.

Taxing online gaming portals has been an issue before the GST Council. The GST law does not define online gaming and deciding what constitutes ‘game of chance’ and ‘game of skill’ has been a challenge before the council. 

While games of chance are taxed at 28 per cent GST, online games of skill like rummy or fantasy sports attract an 18 per cent GST. For instance, if a company falls under the categories of betting, lottery, horse racing and gambling, which are considered services and are games of chance, the rule is clear that 28 per cent GST would be applicable and that amount would be charged on gross gaming value or the total amount of bets placed.

The government has been toying with the idea of considering online gaming as betting and hence, is looking at a 28 per cent tax on the gross gaming value. If implemented, it could ruffle the burgeoning industry’s feathers as there could be an issue with the amount being taxed. 

For instance, if 10 people play a game of rummy on an online portal and contribute Rs 100 each, the platform might be collecting 10 per cent of the total amount as its platform fee, which becomes its gross gaming revenue. But as per the government’s initial plan, there could be a 28 per cent GST on the entire amount of Rs 1,000 collected by the online gaming company. The gaming industry, on its part, wants the government to recognise only Rs 100 as the gross gaming revenue, because the remaining Rs 900 is paid to the winner of the bet. Currently, the online gaming portals are paying 18 per cent GST on Rs 100 (gaming fee) and not the original Rs 1,000 that was collected. If 28 per cent is applied on the entire collected amount of Rs 1,000, the tax incidence for gaming companies becomes Rs 280 while their revenue itself stands at 100—a move that might not sit well with the industry players. 

“The gross gaming revenue is the actual profit a portal makes as the provider. It can be proposed that, at the inception, when a provider gets the money, you (provider) put ‘X’ amount into a service account and ‘Y’ into an escrow account. You pay out of ‘Y’, whatever the winnings are, subject to a 30 per cent TDS. Let that be taken care of through direct taxes. The collection of ‘X’ amount would attract 28 per cent GST,” says a senior official who was part of the documentation of the proposal.

Will It Work?  

Making his argument clear, the senior official says, “It is simple. Either tax (proceeds) at 28 per cent face value and find a way to enforce regulation of black-market betting or online gaming, or you say only the service component (service account) should pay 28 per cent tax.”

Experts feel that segregating the amount collected at inception and charging GST on the services component of the money would be something that the online gaming industry is unlikely to be averse to. Though that would push up their taxation rate, it would still be better than paying more taxes than profits made.

“This (dividing the amount collected) would still be better than what the 28 per cent tax that was being proposed. From a GST perspective, the industry is also saying that GST should be applicable only on the gross gaming revenue. Just that, in such a scenario, the rate would go up from 18 per cent to 28 per cent tax,” says a sector expert from one of the big four accounting firms, who did not wish to be named.

Using the aforementioned example of the rummy game, the expert says that is still something that the industry would be fine with because it will not be paying 28 per cent on Rs 1,000 and paying 28 per cent on Rs 100.

In A Fix

In May 2021, the government had set up a GoM for better evaluation of the services offered by casinos, online gaming portals and race courses for levying GST. The GoM is headed by Meghalaya chief minister Conrad Sangma and the eight-member panel includes Goa panchayati raj minister Mauvin Godinho, Tamil Nadu finance minister P. Thiaga Rajan, Uttar Pradesh finance minister Suresh Khanna, and Telangana finance minister T. Harish Rao.

In the GST Council meeting held in June, the GoM had recommended that online gaming be taxed at the full value of the consideration, including the contest entry fee paid by a player for participating in the game. This meant that a uniform 28 per cent tax would be applicable on online gaming, horse racing and casinos. The recommendation also went against the existing norm of 18 per cent GST on casinos, horse racing and online games where no betting or gambling is involved.

The proposal was vetoed by Goa, which said that the whole amount collected at a casino was not used for betting alone. The chips and coins that are collected are also used to buy beverages and food, the state said. 

The Council then asked the GoM to reconsider its proposal and submit a fresh report on casinos, horse racing and online gaming. The report has been delayed as it has still not been able to take a call on what constitutes games of skill and games of chance as far as the online gaming industry is concerned.