In a recent ruling, the Supreme Court has upheld the constitutional validity of levying 28% GST on online gaming transactions. The ruling has also validated the retrospective tax demand of over Rs 1 lakh crore by the government for the period prior to October 20
Understanding the GST Challenges for Online Gaming Firms
The Directorate General of GST Intelligence (DGGI) issued notices to online gaming companies demanding 28% GST on full-face value of bets placed by customers as against the 18% GST being paid by them on the platform fees earned by them on games of skill being played on their platforms.
The Distinction Between Full-Face Value and Actual Transaction Value
Full-Face Value of Bets: The full value of all bets placed by users on a gaming platform. This includes all currency and tokens that are used to place bets.
Actual Transaction Value: This refers to the actual revenue earned by online gaming platforms. It could be the commission charged by them on games of skill and chance for instance.
The October 2023 notification by the government clarifying that 28% GST would be levied on the full-face value of bets instead of only on games of chance has thrown the industry into unprecedented depths of liability.
Economic Impact on the Online Gaming Sector
With government putting ban on real money gaming, companies are shutting down their business and looking at alternate revenue models. Experts agree with companies’ sentiments and feel that retrieval of GST amount of Rs 1 lakh crore would be difficult task to achieve and even would be counter-productive to government’s tax authorities to recover such huge tax liability, which in any case far exceeds aggregate earning of GST in all past years.
As online gaming companies are already struggling to survive and have shifted to alternate models, recouping their tax dues of Rs 1 Lakh Crore would be nothing short of a miracle given that their collective actual revenues for the year 2024 stand at approximately Rs 31,000 Crore to Rs 32,000 Crore.
Potential Consequences for Company Directors
Because many of the online gaming companies are private limited companies of their directors of pre-October 2023 era, they can be held personally liable for the huge GST debts not recovered.
Seeking Relief: Invoking Section 11A of the CGST Act
In view of the widespread practice of paying 18% GST on the platform fees collected by online gaming companies until the Government’s October 2023 notification which retrospectively changed the tax liability of all online gaming companies to to 28% GST on the full face value of all bets placed, the central government is being urged to consider waiving the past GST liabilities of all online gaming companies as has been done in the past under Section 11A of the CGST Act. Section 11A has been used in the past to waive historical tax liabilities of companies where the non-payment of tax was due to a widely accepted trade practice.
What is Section 11A?
However, another provision of CGST Act, Section 11A, could be invoked by central government to waive past GST liabilities of online gaming industry on the grounds that non-payment of same was due to widely accepted trade practice of industry.
Expert Perspectives on the Court Ruling
As per many tax experts GST can be levied but how can one enforce it retrospectively? The fact that gaming industry has operated on the basis of the said model for years and that it is not fair on the part of Government to change the model of tax and enforce it retrospectively, is something which needs to be looked into by Government.
Section 11A cannot be a blanket amnesty for past penalties that the government is already litigating on taxability. However, government needs to seriously consider the industry’s plea and hold talks with stakeholders to address their concerns and devise a mechanism to ease out the tax payment for past period.
