You may be surprised to know that the Supreme Court of India disagrees. This has declared rummy a game of skill – be it offline or online rummy game involving cash. In Andhra Pradesh v K Satyanarayana case (1967), the Supreme Court held that the game of rummy is not purely chance. It requires an “extreme amount of skill” in remembering the falling cards and catching and discarding the cards. In another case – Dr KR Lakshmanan v Tamil Nadu (1996) – the court held that horse racing has been a sport of skill since then. This includes factors such as the fitness and skill of the horse and jockey.
Then what will you do with the 32-year-old founder of a Delhi-based digital marketing firm, Vedant Ahir, who has been playing fantasy cricket for money for two years? For example, before an Indian Premier League (IPL) match, Ahir creates two virtual teams—a “risky XI” and a “safe XI”—that square off against other virtual teams on the gaming platform. If his team wins, he makes money. Ahir is one of the millions of Indian fantasy sports users. Is he playing a game of skill or chance?
The debate is old. The advent of online fantasy games and their phenomenal growth has made this all the more controversial. Many states are suspicious of online gaming addiction for money, and fear its consequences on vulnerable sections. Courts have consistently adopted a less patriarchal approach. Recently, an attempt by the Karnataka government to ban online gaming was rejected by the Karnataka High Court.
For the online gaming industry, this debate also casts a shadow over an important aspect: taxation.
Tax laws are very different for games of chance and games of skill. Skill games are taxed at 18% on “platform fees,” also known as gross gaming revenue (GGR) or rake fees. Games of chance are taxed at 28% on the “competition entry amount”, also known as “bets”. The fantasy gaming industry clearly does not want to be classified as a game of chance and thus more taxed. Indian policy makers cannot be reassured.
Hardik Gandhi, partner at Deloitte Haskins, says, “The industry is apprehensive that online fantasy sports could be taxed at 28% – the equivalent of lottery, betting or gambling – for ethical, social and cultural considerations as well as other financial reasons. from.” And Sells, LLP.
A Group of Ministers led by Meghalaya Chief Minister Conrad Sangma is advising the GST Council on the taxation of casinos, race courses and online gaming. The group meeting took place on 2 May in New Delhi. Sangma told Mint that the GoM is examining what the tax rate should be. However, news agency PTI reported that the panel of state finance ministers is unanimous on increasing the GST rate on gaming to 28%.
High taxation can cripple the industry and put hundreds of millions of venture money at risk, which many fantasy gaming startups shunned. We will be in the quagmire of taxation in no time. But first, let’s look at the sector’s super-charged growth.
the rise of gaming
Online fantasy sports give users a chance to create their own virtual team based on proxy of real players participating in an upcoming match of cricket or football or kabaddi or basketball. Essentially, the user becomes a coach or manager who can pick, drop or trade players of their choice. Gaming platforms like Games24x7 and Dream11 provide a platform to play fantasy games online.
The fantasy sports industry has witnessed tremendous growth in India over the years, exceeding the size of the market 34,000 crores. A report by Federation of Indian Fantasy Sports (FIFS) and Deloitte expects it to increase 1.65 trillion by 2024-25. There are over 130 million fantasy sports users across India. The user base has grown at a compound annual growth rate of 130% between 2016 and 2021. Then there are e-sports, online competitive video-games that are streamed live on various platforms such as Twitch (Amazon’s live video platform), YouTube Gaming. and Facebook Gaming.
A study by MIT (Massachusetts Institute of Technology) and Columbia University states that team selection on online fantasy sports demonstrates a higher level of skill than managing a mutual fund portfolio. Content creator and aspiring fantasy gamer Siddharth Patel would agree. That parallels investing in Smallcase, an investment platform. “You pick your best choice of players and stocks based on past performance, fundamentals of pitches and the theme of the market. Then you sit back and watch them play the game. I recently started with fantasy gaming but since I am familiar with Smallcase, there was no learning curve at all. Every sport is a new rush but you have to be fully aware of your appetite for risk,” he says.
work in progress
Online games are banned in Assam, Andhra Pradesh, Nagaland, Sikkim and Telangana. But many states want to regulate the sector instead of banning it outright. The Gujarat government had earlier introduced the Gujarat Sports Policy in March and Rajasthan Chief Minister Ashok Gehlot announced that he wanted to regulate the sector.
In the Budget for 2022-23, Finance Minister Nirmala Sitharaman announced an Animation, Visual Effects, Gaming and Comics (AVGC) task force that is expected to take into account the regulations required for the gaming industry. Speaking at a post-Budget seminar in March, Prime Minister Narendra Modi also talked about the potential of the online gaming industry and the AVGC task force.
The GST Council is responsible for levying rates on online or offline gaming. It constituted a Group of Ministers on 24 May 2021 to examine the issue of valuation of services provided by casinos, racecourses and online gaming portals. Meanwhile, a 2020 consultation paper on the fantasy sports sector by the Frontier Technology vertical in NITI Aayog makes a case for a self-regulatory model of governance rather than a top-down regulatory control.
tax puzzle
There are two issues at hand- i) the rate of tax and ii) the value on which the rate of tax should be levied.
The evaluation part is tricky. If a platform offers real money games such as fantasy sports, it pools in entry fees from all players. This money is kept in a pool account after deducting the platform fee. Platform fee is what operators charge for the service they provide – tech platforms where people can come and play games. Once the game is over, the money deposited goes to all the winners. If a player has more than a win 10,000, TDS is deducted at 30% and the balance is transferred to the players. Currently, gaming platforms pay GST on the platform fee collected.
Suppose, four players are paying 100 as each competition entry fee for participating in skill-based online games. The amount of the total competition entry fee will be 400. Let’s say the platform fee is 20%. Now the gaming operator will deduct 20% 400 ( 80) and will put 320 in a pool account. This amount will go to the winner. Currently, gaming operators pay 18% tax on the platform fee collected, which is 80 in this example.
If a platform offers a game of chance, it will have to pay 28% GST on the total contest entry fee. In the example above, if it were a game of chance, the gaming operator would have made 28%. would have spent 400 towards GST.
This is why classification of sports is important.
“Introducing a uniform single rate structure could perhaps eliminate any confusion about the classification of the game as a game of skill or chance and settle the issue of evaluation,” says the Deloitte expert. The GST rate could be higher than 18%. Hence, online gaming operators will have no option but to increase the entry fee as the current fee includes 18% GST for most platforms.
The gaming industry argues strongly against a tax on entry fees. “The service that online gaming operators are providing is essentially the same as that of e-commerce platform providers. “Paying the tax rate on the entry fee is absurd,” says Sameer Barde, CEO, e-Gaming Federation.
Admission vs Platform Fee
Another tricky question remains. The prize pool (contest entry fee) that gaming operators collect from players eventually goes to the winners. Whether this collection comes under the purview of “supply” under GST? In this regard the concept of actionable claim needs to be understood. An actionable claim is similar to a claim on an unsecured debt or any beneficial interest in movable property, which is not in the possession of the claimant.
Various courts have held that the amount deposited by the players qualifies as an actionable claim. This is because that amount is to be distributed among the winning participating members according to the result of the game.
Supreme Court’s decision in Sunrise Associates Vs Govt. The NCT of Delhi (2006) concluded that the amount paid by the participant for participation in the draw of the lottery would be treated as an “actionable claim” and not the sale of goods under the Sales Tax Act of various states. Item 6 in Schedule III of the CGST Act states that actionable claims other than lottery, betting and gambling are neither goods nor services for the purpose of GST.
Therefore, the online gaming platform holds that the “actionable claim” relating to “games of skill” is neither goods nor services under the GST law. They argue that they should continue to pay GST on the platform fee collected. In states where game of chance is allowed, gaming platforms pay GST on the money deposited (contest entry fee). “If the actionable claim pertains to a game of skill, you cannot levy GST on the full value of the actionable claim as it is neither goods nor services under the GST Act. If the government still proceeds to levy GST on the full value of the bet, the platform providers will start making losses. Then they may have to pay GST to the players. If the win is squeezed out, the players will be impressed. Thus, the entire economics will be affected,” says Malay Kumar Shukla, chief legal and compliance officer, Games24x7.
The Internet and Mobile Association of India, in a report, has claimed that taxing the entire amount is unfair, unjust and goes beyond the provisions of Rule 31A(3) of CGST Rules 2017. “The taxation of gross gaming revenue should be commensurate with the interests. Government as well as online fantasy sport operating platform. This will keep India abreast of the practices prevalent in countries like United Kingdom, USA, Sweden, Spain etc,” says the report.
A Copenhagen Economics analysis report warns that a tax rate of over 20% can only drive operators and consumers underground. “Gaming is a legitimate form of entertainment as established by seven decades of jurisprudence. If you become unrealistic in taxation, you will only encourage illegal players to operate on the black market. “There will also be a loss of revenue for the government,” says Barde.
The industry is waiting for the rules and the licensing system. It sees a model in the Advertising Standards Council of India (ASCI), a non-governmental self-regulatory organization of the advertising industry. Another option could be a combination of self-regulation as well as government supervision as we have for over-the-top (OTT) platforms. “We recommend that the government constitute a joint committee with all stakeholders to consider various options,” says Barde.
Prompt action on proper taxation and streamlined rules will not only help the gamers and gaming providers, but also the government. There’s a lot left to play. The ball is in the government’s court.