Explained: The tax trouble for online gaming

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A hefty tax notice served on gaming unicorn Gameskraft has unnerved the industry, and revives questions on the taxation of online gaming companies. Mint examines why the sector keeps running into these hurdles.

What does the notice to Gameskraft say?

The show cause notice says Gameskraft’s business should be taxed at a rate of 28% on its gross revenue, since its operations fall under the purview of ‘betting’. The demand comes as talks continue regarding the rate of tax to be levied on online gaming, as well as the base value on which they are to be taxed. The online gaming sector is now taxed at 18% of gross gaming revenue (GGR), or the difference between the total money paid by participants and amount paid out to winners. An interim proposal had suggested 28% GST on gross gaming value (GGV) — which is the total amount paid by participants to play a game.

What is a game of skill versus one of chance?

In Supreme Court judgements in the past, games of skill were defined as those where “success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player”. For instance, the ability to strategize the selection of athletes in a virtual football team, to earn points (and eventually money) from picking the best possible team. Games of chance, on the other hand, are those where winning would depend solely on luck. While gambling is defined by state-wise laws, it is mostly illegal in India, whereas a game of skill is legal under the Constitution.

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How does it matter, other than the legal difference?

Any gambling venture is taxed at 28% of the gross value charged from participants, while skill-based gaming ventures are taxed at 18% of their revenue. Even Google, which has barred real money games (RMGs) — except daily fantasy sports (DFS) and rummy — from its platform in the past and its recent pilot, has done so based on arguments that these aren’t legal in India.

How do DFS, rummy differ from RMG?

RMG refers to any game that accepts payments in real money from users to play. For instance, an online carrom or chess match may qualify as RMG. Both DFS and rummy, on this note, also qualify as RMG. However, DFS and rummy have been ruled as games of skill, and are thus labelled as legal while other RMGs fall in an undefined space. DFS are virtual team sports that involve ‘fantasy’ teams — such as that of cricketers from a league. Rummy, meanwhile, requires players to be the fastest to create a sequence of cards.

What are the proposed tax rules?

While the online gaming industry has more or less accepted that it will be taxed at 28%, they want to have a say on what income the tax will be levied on. A 6 September meeting of a group of ministers tasked with the matter said online gaming would not be clubbed in the same bracket as gambling; however, the recommendation hasn’t been sent to the GST Council, pending legal guidance. The notice served on Gameskraft also cites irregularities in invoicing and discounts, which could amount to tax evasion charges.

 

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