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Skill-based online gaming should be treated differently from gambling and betting: IndiaTech’s letter to Finance Ministry

The tech industry association, which counts Dream11 and MPL as its members, said that higher tax rates will adversely impact the growth of the industry.

“Online skill-based gaming should be treated differently from gambling, betting and horse racing,” read a letter sent by IndiaTech, a tech industry association representing India’s consumer internet start-ups and investors, laying down recommendations it would like the finance ministry to consider while drafting a framework for online games of skill.

The industry body sought clarification to be issued that Rule 31A of the CGST Rules 2017 will not cover games of skill. The rule mandates that the taxable amount will include the face value of the entire bet including the winnings.

Moreover, it recommended that the rule must not be applicable to any form of online gaming where there is a preponderance of skill over chance, thereby covering online fantasy sports effectively. Dream11 and MPL are two of the prominent members of IndiaTech.

IndiaTech is an influential body comprising some of the biggest start-ups present in India. There has been a lot of chatter about how to regulate online games which have flourished in the last few years. It must also be noted that the budget for 2022-23 will be unveiled next week.

Recommendations made by IndiaTech

Evaluating Actionable Claim

The association wants the finance ministry to consider only Gross Gaming Revenue (GGR) or the platform fee as the value of supply continuing the current practice.

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“Additionally, if there are other formats/ revenue models followed by platforms such as subscription fee, in-game revenue etc., in such cases GST should be applicable on only the amount that is received by the platform for providing its services and no GST shall be charged on the prize pool that is kept for the purpose of distribution among the players,” read the letter— parts of which were reviewed by MediaNama.

It reasoned that prize pool money is an actionable claim and activity or transaction pertaining to such actionable claim can neither be considered as supply of goods nor supply of services and hence, is clearly exempted from levy of GST.

18 per cent as the tax rate

The body wrote that games involving predominance of skill “should ideally be taxed at 18% on the platform fee as applicable for entry 998439 as “Other Online Content Not Elsewhere Classified” (NEC).

What is 998439? It is a service code that includes games intended to be played on the internet such as role-playing games (RPGs), strategy games, action games, card games, children’s games. It does not include online gambling services (999692).

“Higher tax rates will adversely impact the growth of the industry,” the letter cautioned. It cited examples of countries like the UK and the U.S. tax on GGR at the rate of 15% to 20%.

The GST Council had constituted a group of ministers last year to address issues related to the online gaming sector for the purposes of taxation, according to Economic Times. The GoM would come up with recommendations on the GST rate for online gaming besides addressing whether GST is applicable on the total transaction value, or the net commissions (revenues) that are earned by gaming firms, ET added.

The GoM has not yet submitted its recommendations to the GST Council, the report revealed.

Making a case against Rule 31A

The letter explained that “the technology platform owner has no right, title or interest over the prize pool amount”. It went on to add that the amount is received and held by a third-party/independent custodian for and on behalf of the players in some cases.

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“Therefore, the prize pool does not form part of the value of services provided by the platform, and hence, no GST is being paid by the technology platform on the prize pool since it has no right over the amount,” the letter averred.

The letter argued that Rule 31A strictly applies to the supply of actionable claims in the form of chance to win in betting, gambling or horse racing.

“Activities and contests predominantly based on chance, such as betting, gambling, lottery and horse racing have been treated as a class itself and distinct from games based on skill. Since Rule 31A uses the word ‘chance’ before describing the activity of betting, gambling covered therein, thus, it is clear that the Rule is intended to apply only to activities and contests based on chance and does not cover online games based on skill,” the letter contended.

IndiaTech calls for a national framework on gaming

The association had sent a letter to the Indian government last year asking it to frame online gaming guidelines at the national level to be followed by the states. IndiaTech. It had affirmed that certain online games have an element of skill despite the involvement of money, distinguishing them from betting and gambling.

“The mere involvement of money does not make any game into an addictive or gambling genre,” the letter addressed to IT Minister Ashwini Vaishnaw read.

The industry body called for the government to refer to the following principles while drafting legislation for online gaming:

  • Derivatives of real-world games and recognised/unrecognised sports, and are played with real players.
  • Played for recreation and not as a profession or to earn a livelihood. These games are played as entertainment, to release stress and for social interaction.
  • Run for short intervals lasting approximately 5-10 minutes for each game session making them non-addictive in nature.
  • Involve meagre monetary contributions which do not amount to gambling or betting.
  • Exist on digital platforms that have reasonable control over an individual’s gaming accounts, specifically around daily/ weekly game time limits, deposit limit and withdrawal limit.

 Also read:

Written By

I cover several beats such as crypto, telecom, and OTT at MediaNama. I will be loitering at my local theatre and consuming movies by the dozen when I am off work.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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