Up until now we have discussed the general overview and socio-economic impacts of RMG in India. Consequently, we have been able to comprehend the core idea of RMG as well as the pros and cons of the business structure for the society. Now we must understand what all challenges are faced by the government while implementing taxation schemes for any RMG setup.
RMG is a tremendously profitable business structure and thereby the revenue generated from taxing the RMG structures would be substantially advantageous for the Indian Economy. However, there are several impediments in the road to an efficient and effective taxation scheme for RMG. Following are the major factors that hamper the efficacy of taxation schemes;
- Legal Complexities: Taxation of real money gaming in India presents several legal complexities due to the ambiguous and evolving regulatory framework surrounding the industry. This challenge arises from the intersection of various laws governing gambling, taxation, and technology. In this response, we will explore the legal complexities involved in the taxation of real money gaming in India, analyse relevant case studies, and discuss current events shaping the landscape.
Gambling Laws in India;
Gambling laws in India are primarily governed by the Public Gambling Act, 1867. This outdated legislation does not clearly distinguish between games of skill and games of chance, resulting in ambiguity when determining the legal status of real money gaming platforms. This creates challenges in defining the taxability of winnings and the applicable tax rates. Furthermore, gambling is a state subject in India, which means that each state has the power to enact its own laws and regulations regarding gambling. As a result, there is no uniformity across the country, leading to confusion and legal complexities resulting in a lack of uniformity. Different states may have different tax rates, thresholds, or exemptions, making it challenging for gaming companies to comply with diverse tax regimes.
Skill versus Chance;
The legal classification of real money gaming as either a game of skill or a game of chance has a significant impact on its taxation. Games of skill are typically exempt from gambling laws and may be subject to different tax treatment compared to games of chance. However, the determination of skill versus chance can be subjective and varies from case to case. The Supreme Court of India has recognized certain games like rummy and poker as games of skill, but the distinction remains a matter of interpretation and debate.
In the landmark judgement of Gaussian Network Pvt. Ltd. (Adda52), the Calcutta High Court ruled that playing online poker on Adda52, a popular real money gaming platform, is a game of skill and not gambling. This judgement provided clarity on the legal status of online poker as a game of skill and impacted the taxation implications for the company and its players.
Further, the legality of platforms like Dream 11 and MPL was challenged in the courts, with some arguing that they constituted gambling. However, in a 2017 judgement, the Supreme Court held that fantasy sports, including those offered by Dream11, involve a substantial degree of skill and are therefore exempt from the definition of gambling.
Examples:
Gaussian Network Pvt. Ltd. (Adda52): In a landmark judgement, the Calcutta High Court ruled that playing online poker on Adda52, a popular real money gaming platform, is a game of skill and not gambling. This judgement provided clarity on the legal status of online poker as a game of skill and impacted the taxation implications for the company and its players.
Dream11 and MPL: Dream11 and MPL (Mobile Premier League) are fantasy sports platforms that have gained significant popularity in India. The legality of such platforms was challenged in the courts, with some arguing that they constituted gambling. However, in a 2017 judgment, the Supreme Court held that fantasy sports, including those offered by Dream11, involve a substantial degree of skill and are therefore exempt from the definition of gambling.
Regulation and Licensing: In recent years, there have been calls for regulating and licensing real money gaming platforms to establish a clear legal framework. The government of India has shown interest in regulating online gambling to protect consumers and generate revenue. In November 2021, the state of Tamil Nadu passed legislation banning online gambling, which further highlights the need for regulatory clarity at the national level.
Taxation Reforms: The government has been considering potential reforms in the taxation of real money gaming. There have been proposals to impose a uniform nationwide tax rate on real money gaming platforms to bring consistency and eliminate disparities across states. Additionally, there have been discussions on introducing a new tax on the winnings of players to enhance revenue collection.
Taxation Framework;
Real money gaming falls under the purview of the Income Tax Act, 1961, which imposes taxes on income generated from such activities. The taxability of real money gaming depends on various factors, including whether the platform is based in India or abroad, the residency status of the player, and the categorization of the game as skill-based or chance-based. Additionally, goods and services tax (GST) may also be applicable to real money gaming, further complicating the taxation structure.
The Goods and Services Tax (GST) is an indirect tax system implemented in India to consolidate various taxes and bring uniformity in the taxation structure. It was introduced on July 1, 2017, replacing multiple indirect taxes like VAT, service tax, excise duty, and others. When it comes to the taxation of real money gaming in India, GST plays a significant role.
Before the implementation of GST, the taxation of real money gaming in India varied across different states. Some states considered it as a game of skill, while others classified it as a game of chance or gambling. Consequently, different tax rates and regulations were applicable in different states. This led to inconsistencies, legal ambiguities, and complexities in the taxation of real money gaming.
The inclusion of real money gaming within the ambit of GST was a consequential step towards achieving uniformity and clarity in the taxation of this sector. The concept of GST aims to tax the consumption of goods and services, and real money gaming falls under the category of services. Therefore, the government decided to tax it under GST to streamline the taxation process and eliminate the disparities prevailing across states.
Real money gaming, including online betting, online casinos, and similar activities, is taxable under GST in India. It falls under the category of “Gambling and Betting Services” and attracts a tax rate of 18% (as of my knowledge cutoff in September 2021). This tax is levied on the net commission earned by the operators facilitating these activities. The operators are required to register under GST, maintain proper records, and file regular returns as per the GST regulations.
Implementing GST rules in the real money gaming sector has posed certain challenges:
Classification: Determining whether a particular real money gaming activity qualifies as a game of skill or a game of chance is a challenge. Skill-based games are exempted from GST, while chance-based games are taxable. The classification often requires a detailed analysis of the game mechanics and individual cases, leading to potential disputes.
Jurisdictional Issues: The taxation of real money gaming is affected by the divergent views of different states. Some states have implemented specific laws regulating online gaming, while others have not. This results in inconsistencies and confusion regarding the applicability of GST and other taxes.
Regulatory Framework: The real money gaming sector in India lacks a comprehensive regulatory framework at the national level. The absence of clear guidelines and regulations makes it difficult to enforce GST compliance uniformly across the industry.
Technological Challenges: Monitoring and tracking transactions in the online gaming industry can be complex due to the use of digital platforms and emerging technologies. Ensuring accurate reporting, preventing tax evasion, and maintaining transparency become challenging tasks.
Legal Interpretation: The interpretation of GST laws and their application to real money gaming activities is still evolving. The judiciary plays a crucial role in settling disputes and providing clarity on issues such as taxability, classification, and liability.
All in all, GST has played a significant role in bringing uniformity and clarity to the taxation of real money gaming in India. Its implementation has addressed the disparities that existed across states and streamlined the tax structure. However, challenges related to classification, jurisdiction, regulatory framework, technology, and legal interpretation remain, necessitating continuous efforts to resolve them effectively.
- Jurisdictional Issues: Taxation of real money gaming in India faces jurisdictional challenges due to the overlapping authority of various governmental bodies and the lack of clear regulations. Following is a clear list;
Multiple Regulatory Bodies:
Real money gaming falls under the purview of multiple regulatory bodies in India, including the central government, state governments, and sector-specific bodies. Each entity has its own set of rules and regulations, leading to conflicting interpretations and jurisdictional issues.
Example: The state of Nagaland introduced the Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skill Act in 2016, regulating online games of skill. Under this act, operators are required to obtain a license from the Nagaland government. However, other states may have different regulations or no specific regulations at all, making it challenging to determine the applicable tax structure and jurisdiction.
Lack of Uniformity:
The absence of a unified approach to taxing real money gaming across India adds to the jurisdictional challenges. Each state has the authority to formulate its own tax policies, resulting in a lack of uniformity in tax rates, thresholds, and compliance requirements.
Example: Different states impose varying rates of taxation on real money gaming, ranging from 18% to 28% under GST. Additionally, some states may impose additional taxes or cess on gambling activities, further complicating the taxation landscape. This lack of uniformity makes it difficult for operators to navigate the tax liabilities across different jurisdictions.
Summing up, it can be seen that the jurisdictional challenges in the taxation of real money gaming in India stem from the overlapping authority of central and state governments, conflicting interpretations of laws, the ambiguity in GST classification, multiple regulatory bodies, and the lack of uniformity in tax policies. These challenges create a complex environment for both operators and tax authorities, requiring a comprehensive and harmonized approach to address the jurisdictional issues effectively.
- Comtemporary Scenario: Numerous people participate in a variety of financial gaming activities, such as fantasy leagues, card games, and online competitions. Previously, Section 194B of the Income Tax Act, which mandates the withholding of tax on winners from lotteries, crossword puzzles, and other games when the winnings exceed INR 10,000, governed the taxation of winnings from such activities. Section 115BB of the Act, which imposes a tax rate of 30%, governs the taxation of these gains in the hands of certain participants.
The government unveiled a plan in the month of March, 2023 that would drastically alter the nation’s online gaming industry. The proposed measure essentially eliminated the previously established threshold limit of Rs 10,000 by imposing a 30% tax on net gains from online gambling. This action demonstrated the government’s dedication to policing the online gaming sector and ensuring that all of its players pay their fair share of taxes.
A independent tax law that applies to the world of online gaming has been adopted as part of the Finance Bill 2023, which is in accordance with the recently announced Budget 2023–24. The bill’s measures, such as the withholding tax under Section 194BA and the income tax on wins from online games under Section 115BBJ, aim to further demonstrate the government’s commitment to policing this quickly expanding industry. Furthermore, the government’s distinction between gaming and gambling through various tax laws shows that they are aware of the unique qualities of each.
Despite being praiseworthy in its efforts to make the taxation system for gains from online gambling simpler, the 2018 Budget proposal also has the potential to deter casual gamers from taking part. People who do not spend or win a lot of money will be affected by the elimination of the TDS threshold since even minor winnings would be subject to tax. This shift may have a negative impact on the development and participation of casual players in this market, which would be sad for a market that is already well-liked, prospering, and capable of seeing exponential growth in the future.
The differing ‘effective dates’ of the newly proposed provisions, in respect to the TDS’s application to online gaming, are another significant issue originating from the Budget 2023 release. It is recommended that the recently added section 115BBJ, which defines online gambling and details how net wins are computed, go into effect on April 1, 2024, for the AY 2024–2025. On the other hand, it is recommended that the new TDS rules under section 194BA for earnings from online gambling take effect on July 1, 2023.
As a result, online gaming revenue would be subject to the conditions outlined in section 115BBJ, and ITRs for AY 24–25, which corresponds to FY 23–24, must be submitted in accordance with that section’s instructions.
However, for TDS purposes, the current TDS provision, or section 194B, will remain in effect until June 30, 2023, after which the new provision, or section 194BA, would apply. Due to the adoption of Section 194B from 1 April to 30 June 2023, the aforementioned anomaly will result in platforms having increased TDS obligation due to short TDS deductions.
Due to the aforementioned reasons, the sector will face significant obstacles when implementing the required technology changes twice in the space of three months since various tax regimes will be in effect. A number of smaller gaming enterprises may find it difficult to absorb the excessive expenses caused by the industry’s recurrent advancements, which will also drive up prices for the sector.
It would thus be preferable to simplify the application of the changes for “online game” and set a single effective date of April 1, 2023. As an alternative, the present tax system might be maintained from April 1, 2023, through June 30, 2023, without using the revised section 194B. This would make it easier to resolve any ambiguities in interpretation and practical issues, resulting in more effective and efficient administration of regulations for the online gambling sector.
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