The authorities read Section 15 of the CGST act and the Rule 31A(3) of the CGST rules 2017 together thereby resulting in a situation where there are exorbitant amounts of tax on online gaming sites. The authorities fail to notice that online gambling is not similar to the situation of horse racing or other actionable claims of the similar nature. The concept of online sports or DFS have a completely different structure and hence have to be taxed separately from the other physical forms of actionable claims.
The grey area needs to be given some clarity either by the judiciary or by the legislature or this has potential to lead to a situation where the tax authorities charge large amounts as tax and that in turn adversely impacts a budding business. The government has to be careful and make sure such entry barriers are not created as these can also lead to other situations such as only one or two companies who have a lot of capital being able to dominate a market such as this thereby killing the competition.
Introduction
India has seen a surge in on- line gaming and Daily Fantasy Sports in the recent few years. After the Judgments of the Hon’ble Supreme Court in K. R. Lakshmanan v. State of Tamil Nadu various High Courts on fantasy sports and online gambling being a game of skill and hence being legal the popularity of such sports went up in large amounts in the country. The legality of these sports brought a completely new aspect of them into the eyes of the law enforcement with regard to the taxation that should be applied with regard to these games. The law enforcement split the online gaming sector into two parts one being the tax to be paid by the individual who wins an amount in the game and the other to be paid by the company which provides for the platform of gaming. The former being governed under Section 194B and 115BB of the Income tax act and the latter by Section 15 of the Central GST act and Rule 31A(3) of the GST rules. We will discuss in detail about how the following acts will fall under this section, how much tax will the following parties have to pay and how since GST is a fairly new law this grey area might seem a little problematic to the parties.
Goods and Services Tax focuses mainly on the ‘supply for a consideration by a person in the course or furtherance of business’ and such aspects of various companies.
‘Does this concept of online gaming fall under the term supply?’
The term supply is defined very broadly and is given a lot of scope so as to ensure that nothing gets left out. The term supply is inclusive and it also includes deemed and declared supply under the schedule I and II of the Act. Section 7 of the act defines Supply as
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section
(1),–– (a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as pub- lic authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as— (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods.
Here Section 7(1)(b) talks about import of services for a consideration whether or not in furtherance of a business. Post the courts in India declaring the online games legal, they started registering as business entities who provide the service of gam- ing for the consideration of a registration fee. For example the registration fee that is paid to enter a room in a on- line poker game is a consideration that is paid for play- ing poker and the company that facilitates the playing of the game becomes the sup- plier of the service (i.e. the games). Since this platform of online gaming is considered as a supplier it in accordance with the GST is liable to pay tax for supply. Every supplier whose aggregate turnover is a financial year exceeds 20 lakhs rupees is required to be registered. So, in case of online games as well if the proceeds ex- ceed 20 lakhs rupees, the platform is to be registered. As till date platforms conducting online games are not included in the category of compulsory registration, they can enjoy the threshold exemption as long as they do not touch 20 lakhs as an aggregate turnover and thereafter follow the procedure prescribed under law.
‘What Is the value and amount or bracket of GST that has to be paid by these companies?’
As per section 15 (1) of the CGST Act the value of supply of goods or services shall be transaction value, which is the price actually paid or payable for the said supply of goods or services. This is where the problem arises with regard to businesses such as online sports or DFS. In the online games the platform charges a fixed amount from the player out of which a certain portion is ploughed back to the player in form of incentives, prizes, rewards etc. For example, if a game charges Rs 10 as registration, it, at the end of the game, pays Rs 6 as a reward and keeps the rest for itself as the cost of supply. Now how much of this can be taxed as GST and will the amount that is returned as the price be charged under GST or under Section 194B and 115BB of the Income tax act.
To answer this we need to look at Section 15 of the GST act very closely.
Section 15 (1) reads “The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the sup- plier and the recipient of the supply are not related and the price is the sole consideration for the supply.”
The Section reads as the “price actually paid or payable for the said supply of good and services or both”. Here it is important that one stresses at the term ‘actually paid’. So here it means the amount that is left with these gaming companies post the distribution of winning prices that is actually used to run/ conduct the competition is what is the price that will be charged under Section 15 at the rate of 28% but this does not end here. With regard to online gaming, Section 15 of the CGST act is read with Rule 31A(3) of the CGST Rules of 2017.
This rules reads as “The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator.”
The authorities read Section 15 of the CGST act and the Rule 31A(3) of the CGST rules 2017 together thereby resulting in a situation where there are exorbitant amounts of tax on online gaming sites. The authorities fail to notice that online gambling is not similar to the situation of Horse racing or other actionable claims of the similar nature. The concept of online sports or DFS have a completely different structure and hence have to be taxed separately from the other physical forms of actionable claims.
Since the concept of DFS and other online sports is very new in India and there isn’t much clarity on their structure of operation, there is a grey area which is created in enforcement of law wherein it is not clear as to under which section shall tax be levied on such acts. The authorities here have turned this grey area into an opportunity to read both sections together so as to charge larger amounts of tax on this budding field.
Once this money is taxed, the Income tax department also charges the amount of winings under Section 194B and 115BB of the Income tax act from the winner/player/ user of the online gaming site. It is very important here to reiterate here that a portion of the money that is used to place a bet and used to file the registration fees is only used by the online gaming site as rewards that is sent back to the players. This becomes a case of double taxation solely because of the fact that the authorities charge tax under Rule 31A(3) of the CGST rules 2017. This is so because this rules takes tax from the bet that is placed by the Player and then the authorities also tax the winning of the player, thereby charging the player twice.
‘Does this amount to double taxation and is that valid in law?’
The authorities will at this point either have to forgo charging the tax under Section 115BB and 194B or under Rule 31A(3) so as to avoid this situation of double taxation. The Hon’ble Supreme Court in the case of Uttar Pradesh v. Raze Buland Sugar Co. Ltd. held that the principle that is applicable in tax statutes is that the income is subject to tax in the hands of the same person only once. Thus, if an association or a firm is taxed in respect of its in- come the same income can- not be charged again in the hands of the members individually and vice versa”.
The Hon’ble apex court in the case of CIT v. Damani Brothers held that, “…There can be, no dispute that double levy of interest is not permissible. But this principle is applicable only when the interest is chargeable more than once for the same set of refractions. If the provisions under which interests are charged operate in different fields, there is no statutory bar on levying the interest because in essence it does not amount to double levy of interest but levy of interest separately for different refractions.”
Now both these Judgments talk about how taxing the same individual twice is not sound in law, but do the authorities ‘on paper’ tax the same individual twice?
Technically the bet that is placed by an individual goes to the company that runs the online gambling site which in turn returns all this bet money to the winner of that game. The tax authorities tax the gambling company 100% of the bet amount under Rule 31A(3). Here it is very important to notice that the online gambling sites are not allowed under law to make any profits out of the betting activity any such profits will be illegal. What the gambling companies do at this point is that they make profit through other sources such as advertisements. They merely rotate the betting amount by collecting it and finally giving it to the winner as rewards. So when the tax authorities charge the company under Rule 31A(3), on paper they charge the company but then the source of that income is actually the player/ user himself. This isn’t entirely fair on the company because they are not allowed to hold back any of those funds either and hence most of these companies have to end up paying exorbitant amounts as taxes.
This grey area needs to be given some clarity either by the judiciary or by the legislature or this has potential to lead to a situation where the tax authorities charge large amounts as tax and that in turn adversely impacts a budding business. The government has to be careful and make sure such entry barriers are not created as these can also lead to other situations such as only one or two companies who have a lot of capital being able to dominate a market such as this thereby killing the competition. Hence it is necessary that the government come up with some clarity on this regard so as to set a fixed amount of tax for this sector of online sports.
(Shubhendu Anand is Part- ner, Atharva Legal LLP. V Sai Shank is a final year law student at SASTRA University, Thanjavur.)