GST Council's decision impacts gaming industry's future prospects

[Devan Gupta]

The Impact of the Recommendations and decisions of the 50^th GST Council meeting on the Online Gaming Industry

The GST Council on 11th July convened it’s 50th meeting in which they laid down landmark changes in the GST ecosystem which impacts various sectors and industries. One of the most impacted sector remains online gaming. Here is the same decoded by the Cretum Advisory Indirect Tax Team:

At present GST is being charged @18% on the platform fee which is charged by online gaming companies from the players, however in the meeting conducted yesterday, the second report by the Group of Ministers (GoM) was presented and in consensus with the other members of the council it was decided that  GST will be charged at @28% on the Gross Gaming Revenue (GGR) or the full face value of the bets placed by the players.

Comparison of Old vs. New

Practical Explanation of the Current Structure including the implications of the Income Tax Regime

Practical Explanation of the Proposed Structure by the 50th GST Council Meeting including the implications of the Income Tax Regime

Let’s Suppose an amount of Rs. 1,00,000/- Further a 10% platform fee charged on this amount which will amount to Rs. 10,000/- Currently GST is charged @18% on this platform fee, amounting to Rs. 1800/- Therefore, total value of transaction amounts to: 1,00,000/- + 10,000/- + 1800/- = Rs. 1,11,800/- Playable amount left with the person = Rs. 1,00,000/- Now let’s suppose the person to bet the above amount wins a total of Rs. 2,00,000/-, I.e. an increase of 100% on his betted amount, meaning a net return of Rs. 1,00,000/- on the invested amount. As per Section 115 BBJ of the Income Tax Act, 1961 this amount won is subject to a flat rate of 30%, i.e. Rs. 30,000/-. Now Let’s do the math about how much the person actually invests, pays to the government and actually is left with: 2,00,000 (Actual amount left with after playing) (-)1,00,000 (Actual amount betted) (-) 10,000 (Paid to the online gaming company as platform fee) (-) 1800 (paid as GST to the government) (-) 30,000 (paid as income tax @30% to the government)   = Rs. 58,200/- (Actual amount left in hand after deducting all the above on winnings)   It can be observed that an amount of Rs. 31,800/- is paid to the government in the current scenario as taxes.

Let’s Suppose an amount of Rs. 1,00,000/- Further a 10% platform fee charged on this amount which will amount to Rs. 10,000/- In the proposed scenario GST on the platform fee shall be charged @18% and GST @28% may be charged on the entire betted amount i.e., Rs. 1800/- and Rs. 28,000/- respectively. The total value of the transaction in this case also remains Rs. 1,11,800/-. The playable amount left with the person = Rs. 72,000/- (after paying GST @28%) Let’s suppose in this case the person wins an amount of Rs. 1,44,000/- i.e. an increase of 100% on his betted amount, meaning a net return of Rs. 72,000/- on the invested amount. As per Section 115 BBJ of the Income Tax Act, 1961 this amount won is subject to a flat rate of 30%, i.e. Rs. 21,600/-. Now Let’s do the math about how much the person actually invests, pays to the government and actually is left with: Rs. 1,44,000/- (Actual amount left with after playing) (-) 72,000 (Actual amount betted) (-) 10,000 (Paid to the online gaming company as platform fee) (-)1800 (paid as GST to the government) (-) 28,000 (paid as GST to the government) (-) 21,600 (paid as income tax @30% to the government) = Rs. 10,600/- (Actual amount left in hand after deducting all the above on winnings) It can be observed that an amount of Rs. 51,400/- is paid to the government in the current scenario as taxes.

 

It can be observed from the above that in both the scenarios the person wanted to play and bet a sum of Rs. 1,00,000/- however it is possible only in the current scenario to do so, in the proposed decision GST @28% will be deducted from the face value of the transaction amount.

The burden on the online gaming companies for compliance will surely increase to the extent that they will now have to carefully monitor each transaction and bet that is being placed on their platforms, which in turn would require additional infrastructure and investment on their part, but the question to ponder is that will companies be willing to invest such amount when they know that this decision will only impact them negatively.

A major backlash has been faced by the Finance Ministry and the finance minister herself due to this decision since yesterday, other than calling this decision unconstitutional, many people think that this will lead to a drastic loss of revenue, decrease in the number of players and a huge amount of job losses.

Important questions to consider from this decision:

1. What will the government classify this amount as, whether a good or a service?

2. What changes will be brought in case of the platform fee charged by the online gaming companies currently; will they also be brought under the ambit of an increased GST rate of 28%?

3. As many bets are placed online on a daily basis of various amounts whether small or large, in our country which has the largest share of players in the world and the fastest growing online gaming industry, will there be a minimum limit above which such GST will be charged?

4. As this decision will lead to an increased compliance on the part of the Online gaming companies, how will these companies be expected to monitor the number of bets placed and on what amount to pay or deduct the GST from?