Taxability of Online Games under Goods and Service Tax

We all know that how things are getting revamped and in the last 5-6 years technology has massive changes. People can earn online now; it was seeming impossible before. We all played video games but now the scenario has changed. People and especially youngsters are earning income through gaming. Some earn by developing the game and some earn through playing online. So, what about taxes? Did GST apply to this industry? And the most important thing is this cover under Services? So, our discussion is on Gaming and GST.

This is the industry which has a significant influence on the youth, not just kids but even youngsters are constantly indulged in games. As such, it becomes pertinent to understand the tax implications that online gaming is exposed to.

Online Information and Database Access and Retrieval Services (in short, OIDAR Services) have beendefined under GST vide section 2(17) of the IGST Act, 2017. It means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of whichrenders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,

  • advertising on the internet;
  • providing cloud services;
  • provision of e-books, movie, music, software and other intangibles through
  • telecommunication networks orinternet;
  • providing data or information, retrievable or otherwise, to any person in electronic
  • form through a computernetwork;
  • online supplies of digital content (movies, television shows, music and the like);
  • digital data storage; and
  • online gaming;

Case M/s. Amogh Ramesh Bhatawadekar ruled on the taxability of online gaming under GST. The following were the answers to all the questions which sums up the entire GST implication on the online gaming industry.

The applicant, Amogh Bhatavdekar, located in Thane is a proprietor supplying digital goods, in the subject case ‘online gaming’ and has not obtained GSTIN because he is of the opinion that the services rendered by him is export of e goods (Digital Goods).

Applicant has submitted that, in electronic commerce, digital goods are described as goods, which are stored, delivered and used in electronic format and shipped electronically to the consumer through email or downloaded from the Internet.

Applicant has reproduced the definition of ‘Digital Goods’ from Wikipedia and submitted that, Digital goods are products and services that are completely delivered using information technology i.e., they don’t involve an exchange of physical things.

Applicant’s website address is MMOPLAYSTORE.COM. Applicant contacts the suppliers of digital products requesting a list of digital products that are available with them. Digital Goods are then sent to the applicant by Email or Instant message service and pay-out is issued. These received digital goods are assessed and stored on Cloud Servers for
dispatching to customers of the applicant. Customers visit the Website of the applicant online and make payments to the applicant, after which Digital Goods are then delivered by cloud server to customer by Email. Applicant has submitted their Suppliers are located abroad and include New Game way from China, payproGlobal and MmoBay LLC from the USA. Suppliers are contacted by Email or instant Message service. The Payments are received from customers using PayPal.

The purchase of these digital goods is made online by the applicant’s customers. Once, payment is received, the merchant provides the customer with a digital item as an e-mail attachment or may provide a secure link where the item can be downloaded.

No invoice is raised for delivering digital said goods, which have limited life of say, a few days or weeks. Payments are done by applicant’s customers on line. It is not a software sale and does not require license. There is no work involved at the site of the client.

Applicant has stated that:

(1) Digital goods/e-goods are not necessarily goods as commonly understood & as defined in the GST Acts but they can at best be called as “services.”
(2) They are supply of services done through internet or mails. There is no delivery of egoods as such.
(3) The said e-goods, are stored on CLOUD which are located outside India, & are purchased from vendors outside India who send it to the CLOUD as identified by the buyer / vendor/ the applicant.
(4) The e-goods are not received by the seller in India but are stored on CLOUD hence it cannot be said to be imports in India, hence out of purview of reverse charge mechanism under the IGST Act.
(5) The buyers are usually from abroad, who pay in dollars directly through PAYPAL, therefore it is supply outside India taking it outside purview of IGST levy. It is export of services i.e., it is out and out services not liable to either IGST or CGST & SGST It is covered by the clarificatory Circular No.78/52/2018 -GST New Delhi dated 31/12/2018.

The Court observed that

We have gone through the facts of the case, documents on record and oral and written submissions made by both, the applicant as well as the jurisdictional officer.

Applicant is a supplier in digital goods and has submitted that, in electronic commerce, digital goods/e-goods are used to describe any goods that are stored, delivered & used in its electronic format. These goods are shipped electronically through email or are downloaded from the Internet.

In the subject case the e-goods, referred to by the applicant are ‘online gaming’, as stated by him during the course of Final Hearing. Section 2(17) of the IGST Act, 2017, defines ‘online information and database access or retrieval services’ (OIDAR) as “services whose delivery is mediated by information technology over the interne/ or an electronic network and the nature of which renders their supply essentially automated involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as (vii) online gaming.”

This definition will answer the first question posed by the applicant i.e. e-goods (in this case online gaming) will be considered as services under the GST Laws. The next three questions are regarding classification of the above said services, and the rate of GST on such, if the same are not exempted.

The next question is, under what circumstances would IGST, under reverse charge, be applicable or whether it is applicable in the situation of procurement from foreign supplier & supply from out of India as in the subject case?

The first part of the query asks for circumstances, under which IGST would be applicable on reverse charge basis. In other words, the applicant is not asking as to whether GST is applicable under reverse charge. What is being asked is the circumstances under which reverse charge would be applicable. The circumstances under which reverse charge is applicable finds mention in the IGST Act, 2017. The provisions of Section 97 (2) of the CGST Act, do not envisage raising of such question in an Advance Ruling Application as can be seen from the provisions which are reproduced under:

Section 97:

(1) an applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and manner and accompanied by such fee as may be prescribed, stating the question on which the advance ruling is sought.
(2) The question on which the advance ruling is sought under this Act, shall be in respect of,
(a) classification of any goods or services or both;
(b) applicability of a notification issued under the provisions of this Act;
(c) determination of time and value of supply of goods or services or both;
(d) admissibility of input tax credit of tax paid or deemed to have been paid;
(e) determination of the liability to pay tax on any goods or services or both;
(f) whether applicant is required to be registered;
(g) whether any particular thing done by the applicant with respect to any goods or Services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

Hence, this part of the question cannot be answered, being out of the provisions of Section 97 (2) of the CGST Act, 2017.

We now take up the second part of the query i.e. whether GST under reverse charge is applicable in the situation of procurement from foreign supplier & supply from out of India as in the subject case.

A perusal of the submissions made by the applicant reveals that Digital Goods are purchased by applicant from the suppliers based abroad. Such digital goods, in this case online gaming, are then sent to the applicant by Email or Instant message service. Thus, we find that there is a supply of OIDAR services to the applicant from suppliers based abroad. The nature of OIDAR services is such that it can be provided online from a remote location outside the taxable territory.

A similar service provided by an Indian Service Provider, from within the taxable territory, to recipients in India would be taxable. In cases where the supplier of such service is located outside India and the recipient is a business entity (registered person) located in India, the reverse charge mechanism would get triggered and the recipient in India who is a registered entity under GST will be liable to pay GST under reverse charge and undertake necessary compliances. If the supplier is located outside India and the recipient in India is an individual consumer not registered under GST Laws, in such cases also the place of supply would be India and the transaction is amenable to levy of GST. In such case the individual should obtain registration and pay GST under reverse charge.

The applicant’s further question is, if their customer is from India and paying consideration in dollars, whether it will be allowed as exports or if not, whether GST is leviable? What is rate of SGST &CGST or IGST? Under which HSN Code or SAC?

We find that in case applicant’s customer is from India i.e., taxable territory. Hence, GST would be liable on such transactions. In the case of supply of taxable service, the word ‘consideration’ is the key. As per Section 2(31) of the CGST Act, 2017, Consideration, includes any payment to be made, whether in money or otherwise,

The definition of the term ‘consideration’ speaks in terms of payment to be made in money. The applicant, an Indian citizen is supplying services to Indian citizens in India. In such cases transaction can only be in Indian Rupees and not in dollars. Further, the applicant has not submitted any permissions/documents issued by appropriate authority in India, permitting him to transact in dollars. The classification and rate of GST is already mentioned in para above.

The applicant has not mentioned whether the said customer is located in India or abroad but since the applicant has mentioned that the payment is in Indian Rupees, we assume that the customer is in India which is a taxable territory and since the applicant is also located in India, GST is leviable on such supply of services.

In respect of this question, it is seen that the service is supplied by the applicant from taxable territory to recipients who are also located in taxable territory. The taxable event under GST Laws is ‘supply” of goods or services or both and the supplier of such goods or services or both, is liable to pay GST. In this situation since both, the supplier and recipient of services are located in taxable territory, the subject services will not be considered as exported and the applicant will have to discharge his GST liability on the amounts received for supplying such services.

The last two questions raised by the applicant are “whether IGST is applicable under section 5(3) & 5(4) of the IGST Act and if yes, then its rate May please be clarified” We have already held in para 5.5.3 above that, the applicant is required to obtain registration and pay GST under reverse charge mechanism. We reiterate that IGST is applicable under section 5(3) & 5(4) of the IGST Act at the rate mentioned in para 5.4.1 above i.e., @18%.

Online Gaming will be covered under services under the GST Act and the SAC will be This type of service is not exempted from GST and the rate of GST is 18% on such type of GST. – In the situation of procurement from foreign suppliers & supply from out of India the applicant has to discharge IGST liability under the reverse charge mechanism.

The online gaming industry is expected to grow at a compound annual growth rate (CAGR) of 40% to $2.8 billion by 2022, up from $1.1 billion in 2019, according to a Deloitte India report released on Tuesday. Largely driven by smartphones, affordable data, and increasing disposable income, the rapid growth is expected to strengthen the sector’s share of the total media and entertainment industry by 4−5%.

The findings of the study highlighted that covid-19 has pushed the growth further as users latched on to online gaming platforms in absence of entertainment options during the lockdown. The time spent on gaming apps, increased by 21% during the initial national lockdown, with the total customer base crossing 300 million users. While the arrival of vaccines and resumption of economic activities may result in a leveling off or even decline in the average time spent on video gaming, the industry would already be in a higher gear.

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Akshit Gadhia

Author of Tax Concept. Also, he is the Owner of Gadhia  Associate. The author is an avid reader and the author likes to write on various regulatory compliances. Currently, the Author Is pursuing CS, LLB, and ACCA. He has vast experience in Company Law and Roc Filings, Direct and Indirect Tax, Accounts, and Audits, and many other regulatory forms filings.