- Gameskraft case playing out at Supreme Court
- Government win could mean retrospective 28% levy
India is waging a legal battle against online gaming company Gameskraft that, if successful, could effectively determine retrospective application of the 28% goods and services tax such companies must pay.
Revenue Secretary Sanjay Malhotra said earlier this week that the government has filed a petition in the Supreme Court to challenge a state high court ruling that had quashed India’s tax demand based on the 28% tax rate calculation.
“The Supreme Court’s pronouncement will decide the liabilities for the past period,” said Payal Thaker, partner, indirect tax services at BDO India LLP.
If the court rules in favor of the tax authorities, it could lead to tax demands for other online gaming companies that could add up to hundreds of millions of dollars or more, according to tax practitioners.
“It will be huge,” said Thaker, though she didn’t put an exact number to the potential tax demands. “It may also question the survival of a few players in the industry,” she said.
Companies in India that offer online games involving real money, such as online rummy or poker, have been paying GST at the rate of 18% on the fee they charge clients for playing games. They contended that since their games require skill, they weren’t liable to pay the 28% GST rate applicable to gambling.
Indian tax authorities have disagreed, saying that online games like rummy are akin to gambling, and thus were always bound to pay the GST of 28% on the entire value of bets placed.
India’s Goods and Services Tax Council on Wednesday decided to move ahead with the 28% GST on online gaming and casinos, approving the rules for its implementation. Taxes will apply from the date the law is amended, likely to be Oct.1, and will be at the entry level only, not on each bet placed.
Gameskraft Case
Tax authorities had sent a tax demand of 210 billion rupees, or around $2.6 billion, to Indian gaming company Gameskraft Technologies Pvt. Ltd. for alleged nonpayment of GST since 2017, when the tax was introduced.
Gameskraft challenged the demand in the Karnataka High Court, which quashed it in May.
“The subject Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on the Petitioners’ platforms are not taxable as ‘Betting’ and ‘Gambling’ as contended by the respondents under the CGST Act and Rules or under the impugned show cause notice issued by the respondents,” the court said in its order.
Last month, the GST Council, an apex decision-making body, said that it will amend the GST law to state that online gaming businesses must pay a 28% GST on the full face value of bets placed.
While the provisions of the amended law will be applicable after the law goes into effect, the tax authorities have now appealed against the Karnataka High Court’s order in the Gameskraft case.
The court’s ruling will have a wider implication for the gaming industry, said tax practitioners.
“In case where the Supreme Court rules against Gameskraft, the tax authorities may raise demands for past periods on other operators as well,” said Ipsita Agarwalla, an attorney at Nishith Desai Associates.
This will be problematic as operators will not have any money to pay this additional tax as they would have already distributed funds to the winners,” she said. “It may start a lot of litigation,” said Agarwalla.
Gameskraft counsel said it expects the Karnataka High Court order to be upheld in the Supreme Court. “We are confident that our legal position based on decades of settled jurisprudence will be upheld,” said Sudipta Bhattacharjee, partner, indirect taxes & customs at Khaitan & Co., who is representing Gameskraft.
The appeal against the Karnataka High Court judgment in the Supreme Court will be extremely critical for the entire online gaming sector,” he said. “In the unlikely scenario where this appeal succeeds at the Supreme Court, it might result in massive GST demands (and enforcement actions) against all online real money gaming players for the past periods.”
Source: Bloombergtax