The online gaming sector witnessed a series of watershed developments in the GST regime in the month of October 2023 from legislative and litigative standpoint. The key legislative development was the transition into the new deposit-based GST regime which has become effective from 1 October 2023.

New taxation regime for online gaming w.e.f. 1 October 2023

The 50^th GST Council recommended that the actionable claims supplied in online gaming, and horse racing shall be taxed at the rate of 28% on full face value, irrespective of whether the activities are game of skill or game of chance. Subsequently, post stakeholder consultations, the 51^st GST Council further announced the following critical recommendations:

• Amendment in Entry 6 of Schedule III of CGST Act, 2017 to tax casinos, horse racing and online gaming along with lottery, betting and gambling. New definition of online gaming and specified actionable claims was introduced.
• Special valuation mechanism under Section 15(5) of CGST act for Online Gaming. Valuation of supply of online gaming and actionable claims in casino shall be at entry level based on the amount paid or payable to or deposited with the supplier by or on behalf of player excluding the amount entered into games/bets out of winnings of previous games and bets and not on the total value of each bet placed.
• Insertion of special provision in the IGST Act, 2017 to provide for liability of payment of GST on supply of online money gaming and simplified registration scheme by offshore companies, in addition to the existing OIDAR regulations. Failure to comply with the said provisions would lead to blocking of access to the public under Information Technology Act.
• Specific provisions for valuation of supply of online gaming and actionable claims in casino have been inserted in the CGST Rules, 2017.

During the press conference, Revenue Secretary, provided further clarifications on the anticipated developments in relation to the implementation of the amendments:

• Any betting/gambling involved in online gaming, casino and horse racing, being in the nature of actionable claim, had always been taxable at 28%. However, taxation for past period will be based on the decision taken by Apex Court in Special Leave Petition Court challenging the decision of the Hon’ble Karnataka High Court in the Gameskraft matter.
• Playing of online real money games using Virtual Digital Assets (VDA) shall be subject to GST. The definition of VDA shall be same as that under the Income Tax Act.
• The definition of supplier for the purposes of online gaming and actionable claim shall be amended to include platforms arranging online real money games and actionable claims.
• Distinction will be made between online gaming and online money gaming where money is deposited with an expectation of a prize in the form of money or money’s worth on some outcome.
• The issue of determination of place of supply shall be clarified through Notifications.
• The taxation policies shall be reviewed 6 months post implementation of the amendments.  The subject matter of review will be the rate and the valuation and not the provisions of the Act.

The recommendations required substantive changes in the law and amendments with regard to specified actionable claims to treat online gaming at par with betting and gambling, and other special provisions which were incorporated in the CGST Act upon receiving the President’s asset on 31 August 2023.

The Central Government notified the said announcements through amendments in the GST law on 29 September 2023. The onus of incorporating similar changes into the respective SGST laws thereby rested with the individual states. The deadline for the implementation of these amended provisions across all states had been set for 1 October 2023.

New GST regime of deemed valuation

In the new GST regime, the base of taxation has been shifted from transaction value (platform fee) to deposit value by virtue of the valuation provision under Rule 31B of the CGST Rules which primarily provides that the value of supply shall be based on the total amount deposited with the supplier. Since the premise of levying GST has now shifted from transaction value to deposit value, taxpayers face practical challenges in terms of arriving at the value of supply.

52^nd GST Council meet held on 7 October 2023

At the press conference of the 52^nd GST Council meet held on 7 October 2023, the Revenue Secretary commented on the series of show-cause notices issued to the companies stating that the law has not been amended retrospectively, the liabilities already existed as online gaming was at par with betting and gambling. Further, the States which were yet to pass the amendments agreed to pass the same through ordinance or amendment w.e.f. 1 October 2023.

The GST Department on 18 October 2023 issued an advisory to offshore online real money firms in relation to registration under the GST Laws.

Judicial Developments

Supreme Court

In line with the Revenue Secretary’s clarification in the press conference of the 51^st GST Council meet, the Revenue department has filed an SLP in the Gameskraft matter against the decision of the Karanataka High Court quashing a INR 21,000 crore demand made against online gaming company- Gameskraft. The Supreme Court on 6 September 2023 stayed the decision of the Karnataka High Court, the next hearing being tentatively scheduled for 20 November 2023. GST authorities issued show-cause notices to online gaming companies and casino operators based on existing provisions. 

Sikkim High Court

Further, the Sikkim High Court on 20 October 2023 issued notice to all parties on an interim application filed by casino and gaming company Delta Corp Limited challenging show-cause notice worth INR 628 crore and ordered that the status quo as on today should be maintained by the respondents with regard to the show-cause notice implying that no coercive action be taken against the petitioner. In its writ petition, Delta Corp had challenged Rule 31A of the CGST Rules, 2017, Section 15(5) of the CGST Act, 2017, besides challenging certain other circulars, clarifications and rate notifications issued by the CBIC.

Bombay High Court (Goa Bench)

Further, there is a writ petition pending before the Bombay High Court (Goa Bench) filed by Delta Corp Limited and its subsidiaries Delta Pleasure Cruise Company Private Limited and Highstreet Cruises, Entertainment Private Limited challenging show cause notices worth over INR 16,000 crore in which the division bench has issued notices to respondents to file their reply within 6 weeks. Counsel for revenue agreed to keep the adjudication of the SCN pending.

The online gaming companies now await the hearing before Supreme Court’s scheduled on 20 November 2023.