The Author, Adv. Vinayak Kulkarni is a practicing Advocate before High Court of Karnataka.
The online gaming industry in India is a nascent industry and growing exponentially, it is reported that India’s gaming market hit $2.6 billion in FY22 and is projected to reach $8.6 billion in FY27[1]. In a latest development, the Ministry of Electronics and Information Technology has come up with a draft notification i.e, ., Information Technology (Intermediary Liability and Digital Media Ethics Code) Rules, 2021 to regulate online games[2] (hereinafter referred to as draft guidelines). The Goods and Service Tax Council (GST Council) seems to be struggling to arrive at a consensus about taxing the online gaming sector[3]. It has been proposed by the Group of Ministers (GoM) that there can be two accounts segregated for the amounts collected by the gaming portals i.e, service account and escrow accounts. As per the said proposal, the service account will be levied with GST at the rate of 28% and the escrow account with 30% Tax Deducted at Source, under direct tax rules. It is pertinent to note that the GST law does not define online gaming, and therefore deciding what constitutes ‘game of chance’ and ‘game of skill’ still remains a question for the GST Council.
Let us examine what the probable nature of taxing online gaming with the emerging scenario presently is. Government is of the idea of considering the online gaming as betting and therefore aiming to tax at the rate of 28% on the gross gaming value. Simply put, if there are 10 persons play the game of rummy on an online portal paying Rs. 100 each, the gaming company will collect 10% of the total amount as platform fees. But, it is the government's plan initially that there could be a 28% GST on the entire amount of Rs. 1,000/- collected from 10 persons as above. As the entire sum of winning amount is paid to the person winning the game, it would be appropriate to the tax the Rs. 100/- collected initially i.e, on the gross gaming revenue, as industry counterparts argue. Another aspect relating to this is, when any player makes a payment towards an online game either through contest entry fee, any amount that may be caused to make a payment towards non-gaming aspects may escape the tax net.
It is the proposition of the authors that, taxing the “online gaming” sector in parlance with the “gambling” i.e, the “silence” of latest draft guidelines in the matter of classifying the ‘game of skills’ and ‘game of chance’ that has manifested in unified definition as ‘online games’ as defined under Section 2(e) of the draft guidelines is open to be challenged before the court, leading to excessive litigation and also liable to be stuck down.
The jurisprudence of Game of Skill and Game of Chance:
Firstly, Wagering is a generic term that encapsulates within its ambit, both gambling and betting. Wager or bet is a promise to give money or money’s worth upon determination or ascertainment of an uncertain event[4], in this context it is worth referring to the definition provided under Section 65-B (15) of The Finance Act, 1994 “means putting on stake something of value, particularly money, with the consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”. However, Finance Act, 2017 does not define either Betting or Gambling, according to the Oxford Living Dictionary, betting is: “The action of gambling money on the outcome of a race, game, or other unpredictable event”, thus can be construed as act of putting valuable or liquid cash on the prediction of occurrence or non-occurrence of an event. It is always done against a second party who places his stake against the one placed by the first party. Neither of the parties that have put at stake their wagering amounts should have any control over the event on which the amount is wagered. On the other hand, gaming includes a game of chance or skill or a combination of both, examples include Poker, Pool, Billiards, Fantasy football, internet games, crap, roulette etc.
Though both Betting and Gambling are basically wagers, the difference is explained by the Hon’ble High Court of Madras in Public Prosecutor vs. Verajilal case[5] as - “The principal distinction between gaming and betting or wagering is thus immediately apparent; in gaming the stake is laid by the players upon a game, the result of which may depend to some extent upon the skill of the players, but in a bet or wager, the winning or losing of stake depends solely upon the happening of an uncertain event.”
At this juncture, it would be appropriate to examine what courts have held, in the context of question at hand. It boils down from the basic analysis of all the precedents that it is the “dominant factor test” (also referred to as preponderance test) that is used to determine whether the game is “game of skill” or a “game of chance”.
In State of Bombay v. R.M.D. Chamarbaugwala[6] it was held that,
“17. … a competition in order to avoid the stigma of gambling must depend to a substantial degree upon the exercise of skill. Therefore, a competition success wherein does not depend to a substantial degree upon the exercise of skill is now recognized to be of a gambling nature.”
Further, in State of A.P. v. K. Satyanarayana[7] Hon’ble Court laid down that the game of rummy was a game of skill and therefore did not come under the ambit of gambling. It stated —
“12. … The “three card” game which goes under different names such as “flush”, and “brag”, etc., is a game of pure chance. Rummy, on the other hand, requires a certain amount of skill because the fall of the cards has to be memorized and the building up of rummy requires considerable skill in holding and discarding cards. We cannot, therefore, say that the game of rummy is a game of entire chance.”
In another landmark judgment, M.J. Sivani v. State of Karnataka[8] while delineating the categories of “game of skill” and “game of chance” stated that “No game can be a game of skill alone. Even a skilled player in a game of mere skill may be lucky or unlucky so even in a game of mere skill chance must play its part.”
Later in K.R. Lakshmanan v. State of T.N. [9] it was held that,
“30. We have no hesitation in reaching the conclusion that horse racing is a sport that primarily depends on the special ability acquired by training. It is the speed and stamina of the horse, acquired by training, which matters. Jockeys are experts in the art of riding. Between two equally fast horses, a better-trained jockey can touch the winning post.”
Therefore, the jurisprudence that emerges out of these can be summarized as any particular activity, whether that amounts to gambling or not is dependant on whether the game has a preponderance of skill or chance, and impliedly it cannot be determined by the unified definition or general rules and regulations, as a result of this it has to be determined considering the facts and circumstances of each case.
Recently, in the month of February 2022 Hon’ble Karnataka High Court struck down provisions of the Karnataka Police (Amendment) Act, 2021 insofar as they prohibited betting on online games, including games of skill[10]. In this case State has preferred an appeal and it is pending before the Supreme Court.
In another latest case[11], the Madras High Court struck down Part II of the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 which banned betting or wagering in cyberspace, including games of skill if played for a wager, bet or other stakes.
Upon plain reading of above-shown judgments in the field it is indeed clear that the idea of clubbing both games of skill and games of chance under “online games” together, that even comprises of casinos and horse races hints at serious legal manifestations. On top of that, taxing them together would manifest in to more serious legal hurdles.
Also, across different jurisdictions of the world, games of skill and games of chance are treated differently. Broadly, fantasy sports is identified as a game of skill in the US[12], Australia[13], UK[14], Singapore[15], Brazil[16], and certain countries in the European Union[17]. In this context it is worthwhile to note a statistical analysis that was relied on by the Court of law in United States[18]. It was found that the win rate of top performers in fantasy sports is higher than average performers by 28% (Humphrey v. Viacom, 2007 Supra). In the said study, while arriving at this conclusion due analysis of the performance of players over a period of several months was taken into consideration along with number of studies have used hypotheses tests, probability calculations, and statistical analysis to conclude that performance in fantasy sports is skill-dominant. Also, research has found evidence of learning, consistency, and strategy-based usage - all of which affect payoffs in fantasy sports. There is little to no evidence of randomness or chance. This abundantly proves that in any fantasy sports the player’s performance should be persistent and does not depend on chance factors in a single match. It may be possible that performance standards may vary from time to time, but the performance overall shows an upward trend over multiple rounds(Humphrey v. Viacom, 2007 Supra).
In a study conducted by Daniel Getty and others[19] that took up scrutiny surrounding the legal aspects of the games, which typically hinge on the relative roles of skill and chance in the outcome of a competition following questions were posed- (1) Do players have different expected payoffs when playing the game? (2). Do there exist predetermined observable characteristics about a player that help one to predict payoffs across players? (3). Do actions that a player takes in the game have statistically significant impacts on the payoffs that are achieved? (4). Are player returns correlated over time, implying persistence in skill? And analyzed the skill-luck spectrum and came to the conclusion that skill plays a role in the outcome in fantasy sports competitions.
Therefore, authors on this basis is of the opinion that legal pronouncements across the time spans and across the geographies are categorically separate the “skill-based” and “chance-based” games, and it is essential to determine the same in the context of the definition under Section 2(e) of draft rules. The complexity may further increase considering the “silence” of the draft rules on the aspect of whether States can enact their own laws in the matter concerned.
GST Applicability in relation to “skill based” and “chance based” games:
In the common practice, online games either charge on rake free model i.e, charges of gaming are levied as platform charges for facilitating the game or on freemium mode i.e, the game is free but activities such as improving performance, prolonging the player’s life, skipping levels, and so on are charged. Regardless of the model of this fees collection, the GST applicability is on the front of whether the game is “skill-based” or “chance-based”. Its worth mentioning here that the latter is -gambling and it is subject to a charge of 28%. The value of supply of actionable claims in the nature of lottery, betting, and gambling, etc. has been amended in the year 2018 to provide that such value shall be 100 % of the face value of the bet or the amount paid into the totalizator. The concern has been around the absence of defined valuation rules and the confusion about the levy of GST on the entire value in connection to the rake charge.
In this connection, the High Court of Bombay while dealing with a case concerning an online game[20] concluded that such games are based on skill predominantly and hence, attracted GST at the rate of 18%. It was observed by the said Hon’ble Court that, as regards the valuation, the amount of money pooled by the participants was distributed to the winner based on the result of the game. Hence, they are in the nature of ‘actionable claims’. Accordingly, it held that the pooled amount is a consideration for an activity not eligible to GST. Accordingly, the Court concluded that GST is payable on the platform fee / services alone.
In another case[21], Rajasthan High Court in another matter expressed no opinion on the issue of valuation under GST and left it for the GST authorities to consider, in the light of its judgment, the nature of online fantasy games as not being betting/ gambling.
Concluding Remarks:
Therefore, taxing the “online gaming” sector, in the light of the law enunciated by the courts and studies conducted across geographies, is tricky aspect. It is the opinion of the author in this regard that Section 2(e) of the draft rules should define “online gaming” in a clearer context on two fronts. Firstly, there should be clear demarcation between “chance” and “skill” based games, and secondly, the applicability of taxing laws be made clearer.
The “silence” of latest draft guidelines in the matter of classifying the ‘game of skills’ and ‘game of chance’ has manifested in a unified definition as ‘online games’ as defined under Section 2(e) of the draft guidelines in the present format is, therefore, open to be challenged before the court, leading to excessive litigation and also liable to be stuck down.
The advantage would be, the questions such as whether the GST should be applied to the whole amount collected by the platform in exchange for its services such as admission fees, subscription fees, and in-game revenue against the total pooled money, can easily be addressed. On the other hand, it can also be considered providing credit of the winning amount (in effect, levying GST only on money retained by the gaming platform) or provide for a significantly reduced rate of 1%, if computed on the whole amount.
It is essential to address this issue of taxing online gaming as an important aspect considering the uncertainties and potential litigations that may arise due to possible spurious tax claims. Such ambiguities that may lead to GST investigation affect the businesses and their operations negatively.
References:
[1] https://www.lumikai.com/post/india-s-gaming-market-hit-2-6-billion-in-fy22-and-is-projected-to-reach-8-6-billion-in-fy27
[2]https://www.meity.gov.in/writereaddata/files/Draft%20notification%20for%20amendment%20to%20IT%20 Rules%202021%20for%20Online%20Gaming.pdf
[3] https://www.outlookindia.com/business/online-gaming-segregate-amount-collected-by-portals-for-taxation-suggests-new-proposal-news-229290
[4] Gherulal Parakh vs Mahadeodas Maiya And Others AIR 1959 SC 781
[5] Public Prosecutor v. Verajial Sheth - (1945) 1 MLJ 163
[6] State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699.
[7] State of A.P. v. K. Satyanarayana, AIR 1968 SC 825.
[8] M.J. Sivani v. State of Karnataka, (1995) 6 SCC 289.
[9] K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226.
[10] All India Gaming Federation v. State of Karnataka, 2022 SCC OnLine Kar 435.
[11] Junglee Games India (P) Ltd. v. State of T.N., 2021 SCC OnLine Mad 2762.
[12] Humphrey v. Viacom, 2007 U.S. Dist. LEXIS 44679
[13] https://www.dss.gov.au/communities-and-vulnerable-people/ programmes-services/gambling/review-of-illegal-offshorewagering/
[14] https://www.statsperform.com/resource/can-daily-fantasy-sports-success-uk/
[15] Remote Gambling Act 2014, Part I §§ 5(1)-5(2), Republic of Singapore Government Gazette Acts Supplement, No. 37 (Nov. 26, 2014)/
[16] https://practiceguides.chambers.com/practice-guides/gaming-law-2019/brazil#:~:text=Fantasy%20sports%20are%20not%20regulated,sports%20are%20permitted%20in%20Brazil.&text=Social%20gaming%20is%20not%20regulated%20in%20Brazil
[17] https://blog.vinfotech.com/fantasy-sports/european-laws-on-fantasy-sports#:~:text=Most%20European%20countries%20recognize%20fantasy,business%20is%20legal%20but%20unregulated
[18] FanDuel v. Schneiderman, N.Y. Sup. Ct., 161691/2015
[19] https://dspace.mit.edu/bitstream/handle/1721.1/119466/16m1102094.pdf?sequence=1&isAllowed=y
[20] Criminal Public Interest Litigation No. 22/ 2019 dated April 30, 2019 (Bombay High Court) Upheld by Supreme Court in Special Leave Petition (Criminal) Diary No. 43346/2019 dated December 13, 2019
[21] Rajasthan Case – Dream11
