Distinction Between Games of Skill and Games of Chance Imperative For a Rational GST Framework

The GST Council constituted a Group of Ministers (GoM) in May 2021 to recommend the tax structure for casinos, horseracing and online gaming industries. The GoM presented its report in the 47th GST Council Meeting in June 2022 wherein it recommended 28% tax levy on the total entry amount including the prize poll contribution paid by the player for participation in such games without making a distinction between the games of skill and chance. However, the GST council had advised the GoM to revisit these recommendations after some member states requested reconsideration. Reportedly, the GoM submitted the revised report in December 2022 . In this context, let us examine the possible way forward and suggests a possible set of recommendations.

The first step going forward is to recognize the distinction between games of chance and games of skill. The Supreme Court, in line with the international practice, has over the last six decades repeatedly held that games whose outcomes are predominantly dependent on skill (like online skill games) cannot be equated with games whose outcomes are predominantly dependent on chance (like lottery). Once this distinction is appreciated, it becomes clear that games of skill cannot be treated akin to betting or gambling or lottery. The High Court of Karnataka in its recent order in the case of Gameskraft applied this distinction and held that games of skill are distinct from lottery, betting and gambling. Since only these three actionable claims are leviable to GST at present, the prize pool money in games of skill was held to be beyond the scope of GST. Given that the courts have made it abundantly clear that the fundamental philosophy of games is based on this distinction, it is an imminent that the Council too adopt this time-tested judicial wisdom.

The second step is to identify which online games qualify as games of skill and which as games of chance. On this front, it is important to bring clarity and certainty to avoid any long drawn legal battles. Recently, the Ministry of Electronics and Information Technology (MeitY) has amended the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021. They also provide for every game to be certified by a Self-Regulatory Body (SRB) to be recognised by the Central Government. Therefore, any game that will be certified by the SRB will enjoy a clear and distinct legal status from gambling, betting and lottery. It is important that the GST Council appreciate the role and responsibility of the government recognised SRB and accordingly allow for the judgement of such organization to prevail on the determination of whether a game in question is a game of skill or of chance. This will ensure harmonious policy construction across both the IT Rules, 2021 and the GST Acts.

The third step is to rationalize the tax rate and the taxable value for the industry. Globally there are two models of taxing the online gaming industry. One is the Gross Gaming Revenue (GGR) Model where taxable value is entry amount – prize pool and the tax rate is moderate to high. The other is the Turnover Model where taxable value is the entire entry amount and the tax rate is low. Majority of countries follow the GGR model of taxation. However, the GoM has recommended a model where the taxable value is the entire entry amount, and the tax rate is highest. This structure is not feasible to implement and has no precedence in the world. It is therefore necessary to revisit the valuation and tax rate so as to bring them in line with the best global practices based on the GGR model. 

Additionally, under existing GST laws and jurisprudence in India, there needs to be a nexus between supply of service and the value on which the service is taxed.

The fourth step is to recognize the value the industry adds to the economy and how countries facilitate the growth of online gaming sector and the impact it has on the economy. The Indian gaming market is expected to grow to $5 billion with 500 million users in 2025 at a CAGR of 28-30% and bring in a lot of jobs and investment in the process. The Niti Aayog expects the industry to attract foreign investment, increase innovation, and generate employment in India given that is has raised $2.8 Bn from investors in the last 5 years. To attract such a promising industry, most countries have adopted the industry friendly GGR model. This discourages grey market, keeps innovations in the formal economy, ensures ease of compliance and increases tax revenues. The United Kingdom shifted its tax structure from the turnover tax model to the GGR tax model to reduce the movement of bookmakers to offshore locations with more friendly tax models. Even the senate of France has approved the regime change from turnover to GGR model.

Given India’s ambitions to grow into a gaming and innovation hub, it is prudent to encourage a business-friendly ecosystem that enables experimentation and growth. It is time our tax policy makers became active partners in nurturing such an enabling regulatory environment in the country.

About Author:
Dr John Joseph, served in the Indian Revenue Service for more than three decades.