GST Enforcement on Online Games, Casinos, Lotteries and Racecourses Halted Until Clarifications Issued

GST Sekretariat Moves after Punjab and Haryana HC Order

The Indian online gaming industry, casinos, lotteries and racecourses received a major relief from GST enforcement actions until clarifications on GST rates and applicability are issued by the GST council and by the Panel of Ministers specially appointed by it to look into these matters.

Moving on the grounds of a recent order by the Punjab and Haryana High Court, the GST Sekretariat asked the GST Council to clarify the issue of whether and how GST levy is applicable and at what rate slab for the services provided by operators of online gaming platforms, casinos, lotteries and horse racing events.

The High Court at Chandigarh was petitioned by Witzeal Technology Pvt Ltd, developer and owner of real money gaming platform BigCash, after being subjected to search actions and investigation proceedings by GST enforcement agents. The Witzeal company complained to the court against the measures aimed at tax recovery as being coercive.

The Punjab and Haryana High Court division bench consisting of Justice Ajay Tewari and Justice Alka Sarin pronounced its verdict on September 29 ordering GST authorities to stop all enforcement actions against tax avoidance and wait for clarifications to be issued by the GST Council.

"…no adjudication and no coercive steps would be taken against the petitioner till such time the necessary clarification is issued by the empowered Group of Ministers but they may be permitted to investigate the matter so that if and when the clarification comes they would not have to necessarily reinvent the wheel," stated the ruling of the High Court at Chandigarh.

Several economic operators from the casino and online gaming industries, including Delta Corp, Strike Casino and others, had reportedly received notices demanding tax recovery and were subjected to search and survey measures by the Directorate General of GST Intelligence (DGGI). The Directorate is the law enforcement agency empowered to counter tax evasion and is working under the cap of the Union Ministry of Finance.

GoM Already Examines Valuations of Services by Online Gaming and Casino Operators for GST

The GST council had already constituted a special Panel of Ministers tasked to examine whether any legislation changes are needed relating to the valuation of services provided by physical and online casino operators, digital gaming platforms, lotteries and race courses.

The seven-member Group of Ministers (GoM) was formed earlier this year in May under the lead of Gujarat Deputy Chief Minister Nitin Patel and was reconstituted in June. The Panel was tasked to provide its recommendations within six months after its initiation, but now the GST Sekretariat has asked the GoM to fastrack its work.

Maharashtra AAR Order Attempts to Bring Some Clarity

"Online gaming companies are in nascent stages in India, leading to multiple unresolved issues around taxation and valuation, posing a big challenge for the entire industry. Now a GoM has been constituted to understand, examine and resolve the uncertainty surrounding the valuation of services by casinos, race courses, and online gaming companies," said Rajat Mohan, senior partner at AMRG and Associates chartered accountants firm, when the GoM was constituted in May.

One of the major issues often causing controversy is whether GST should be applied over the full bet amount as state authorities insisted in the Witzeal case. According to various entities, the indirect tax should be levied only on the commission and service or processing fees charged by the operator, especially as often these sums constitute only a small fraction of the whole transaction amount.

Another usual question is whether online game platforms, casinos and lotteries provide goods, services or actionable claims, with the issue reaching the court system including the apex court on several occasions.

According to a December 2020 ruling of the Maharashtra Authority of Advance Ruling (AAR), in the sense of the GST legislation, online games are classifiable under online information and data-based access or retrieval (OIDAR) services and are subject to taxation regardless of the location of the cloud being in India or outside.

Direct and Indirect Taxes

GST complexity is not a direct concern of online gaming, casino and lottery players and horse racing betters since the indirect tax is to be charged and paid to the state and central coffers by registered merchants. Direct income tax, on the other hand, is pretty straightforward as it is owed by individuals for all earnings from betting and wagering, legal and illegal alike.

Income tax is payable by individual players and betters for any winnings exceeding ₹ 10,000. A flat tax of 30 per cent with a 4 per cent surcharge for Health and Education Cess (or a total of 31.2 per cent) is deducted at the source or, in case of offshore gaming platforms, should be paid manually by the individual players themselves.

Indirect tax, however, is added on top of the price of the product or service to be paid by the end consumer, even if charged and administered by the registered merchant. This makes the question of whether the full bet value is a chargeable delivery a major concern for industry and players alike.

Similar Case is Being Heard by the Mumbai High Court

A similar litigation to the Witzeal petition before the Punjab and Haryana HC has been brought to the High Court in Mumbai by casino industry stakeholders who have been served analogous GST recovery notices. The pleading entities in the still ongoing case are represented by WItzeal's lawyer Abhishek A Rastogi, who is a partner at Khaitan & Co.