A gaming firm is being asked to pay Rs 21,000 crore in GST. Why?

Bengaluru-based gaming company Gameskraft Technology (GTPL) has been slapped with a GST notice of Rs 21,000 crore by the Director General of Goods and Services Tax Intelligence (DGGI) for evading GST on business transactions between 2017 and June 2022. Though the department has several accusations against Gameskraft, the company insists that the GST notice is ''a departure'' from the GST law in India.  

Accusations against Gameskraft: Gameskraft Technology is accused of:

1. Promoting online betting through card, casual and fantasy games like Rummy Culture, Gamezy and Rummy Time.
2. Promoting the practice among customers to place monetary bets by encouraging them to transfer money into wallets ( The amount transferred into wallets cannot be withdrawn or reused in any other way).
3. Allowing its clients to place monetary bets on the online games and not issuing any invoice to its customers on the betting amount.
4. Providing back-dated invoices to the tax authorities for evading taxes.
5. Paying taxes at the rate of 18% when they should ideally be paying GST of 28% (as per the GST department).

What is Gameskraft saying? As reported in Business Standard, a Gameskraft spokesperson believes that there is a difference in opinion over how the gaming service is looked at by the department and by the gaming industry. Online games which are ''games of chance and lottery'' are levied a GST of 28% whereas online games that require ''skills'' are taxed at 18%. 

Now because the GST department looks at these games as a mere event of ''chance and lottery'' they believe that gaming companies should be paying taxes at 28%. Whereas the gaming industry considers these games to be ''skill based'' and hence pays taxes as per 18%. Also, some Supreme court and high court rulings have pronounced some games like Rummy, horse racing, bridge and fantasy games as ''skill-based games'' which further confirms that Gameskraft is correct, at least when it comes to tax rates.  

The company believes that ''the notice is a departure from the well-established law of the land. As a responsible start-up with a Unicorn status in the online skill gaming sector, we have discharged our GST and income tax liabilities as per standard industry practice, which is now over a decade old.'' 

What does the government say? Historically, governments and income tax laws have looked at 3 industries with the same set of suspicious eyes. These 3 industries include online gaming, horse racing and gambling. But in the last few years, the Indian government has been quite encouraging of the online gaming industry which is rapidly expanding in India and is set to become a $5 billion (Rs 40,763 crore) industry by 2025. 

The Ministry of Finance and the Government of India constituted a Group of Ministers (GOM) in May 2022 to study the GST rates on casinos, racecourses and online gaming. This GOM is currently headed by the Chief Minister of Meghalaya, Conrad Sangma, who has been meeting the group of ministers to discuss matters like GST valuation, GST tax rates and technical aspects of online gaming.

There have been three major issues when it comes to GST on online gaming: 

1. GST rates
2. GST valuation
3. Classification of what is ''game of skill'' (ie. 18%) vs ''game of chance'' (ie. 28%).   

1. GST rates: Though GST rates were 18% initially, in July 2022, the GOM recommended increasing GST on online gaming to 28% from 18%. Remember, this is in addition to the 30% income tax that customers have to pay on winnings. This means online gamers would spend at least 50-55% in taxes alone. As per a report by ASSOCHAM and EY, the GST rate hike will force the gaming industry to pay more taxes (more than 10-20 times), will discourage online gamers and reduce its domestic growth. On September 5, 2022, the GOM decided that online gaming will not be considered similar to casinos and racecourses. 

2. GST valuation: First understand the difference between GVV and GGR. 

In the online gaming industry, players combine their money (transfer money to wallets) to create a prize pool which is also called Gross Gaming Value (GVV). This GVV is then used to pay out the winnings. Say the gaming company receives a total combined deposit of Rs 50,000 from customers and pays out winnings of Rs 27,000, then the company has to pay GST on the Gross Gaming Revenue (GGR) ie Rs 23,000, which they have directly earned.

But the GoM had been considering levying GST on the gross gaming value (GVV), which is the total value of the stake put in by players. That means a tax on the entire Rs 50,000 contributed, which would be hard on the industry.   

The DGCI is set to issue more such notices to multiple online gaming companies and recover more than 2.5 lakh crore in GST. While Gameskraft just seems to be the first goat, do these notices make sense when GST laws are evolving and yet to be set in stone?