Taxation of Online Gaming

Let us understand the online gaming ecosystem in India with reference to the applicability of the Indirect tax and direct tax provisions in India.

·         There are two types of gaming

(i) Chance-based gaming which is a kind of gambling and the same is not trade by Article 19(1)(g) of the Constitution of India.

(ii)                 On the other hand, competitions involving ‘substantial skill’ form a distinct category and are business activities protected by Article 19(1)(g).

 

·         Income Tax 

Ø  Income from online gaming is considered ‘income from other sources’ u/s 115B of the IT Act.   

Ø  The entire amount received will be taxable at the maximum tax rate of 30%. (plus SC and Cess).

Ø  No deduction under section 80C, 80D, or any other deduction/allowance is allowed 

Ø  The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle, card game and other game of any sort in an amount exceeding Rs. 10 K shall, deduct income-tax thereon at the rates in force.

  

·         GST

Ø  Gambling or betting falls under heading 999692 and hence taxable @ 28% whereas online gaming platforms falls under heading 998439 and taxable @ 18%. (Bombay HC - Dream-11).   This classification will start the controversy whether service provided is skill based or chance based.   

Ø  Further, Tax would be charged on gross gaming value, or the total amount of bets placed is also not clear. For instance, if 10 people play a game of rummy on an online portal and contribute Rs 100 each, there could be a 28% GST on the entire amount (‘gross gaming value’) of Rs 1,000 collected by the online gaming company. The gaming industry, on its part, wants the government to recognize only Rs 100 as taxable because the remaining Rs 900 is paid to the winner of the bet

  

·         With the captioned confusion and lack of clarity, the GST department of Karnataka issued notice of Rs. 21,000 Crore on Gamekraft considering their service as betting and on gross earning whereas GameKkraft considered their service as skill based and also GST  should applicable on bet value. 

 

·         Sports, recreation, entertainment, and gaming—which has blossomed into an ecosystem of mobile and      online games owing to the utilization of the metaverse, web 3.0, and digital transformation—are essential aspects of life that cannot be disregarded. Raising notice with such a huge demand will cause only havoc among its stakeholders and prevent them from doing business where India has become a hub internationally for online gaming. Government should provide immediate clarification so that strategy be developed that would allow online gaming  to develop inside a  controlled environment.