Gaming vs Gambling, Skill vs Chance: Controversy surrounds the Gaming industry in India – The Financial Express

By Gunjan Prabhakaran and Payal Thaker

The online gaming industry has witnessed significant growth since its emergence way back in the year 2000, showcasing immense growth potential. Within a couple of decades, it grew to become more than a billion-dollar industry and continues to grow exponentially. The trajectory of the growth has been eventful.

Online gaming can be broadly classified as games of chance where the outcome is predominantly driven by luck and games of skill where the success depends principally upon the knowledge, training, expertise and experience of the player. Gambling is traditionally considered an act of risking something of value with a chance to win prizes. One would engage in a game of chance by putting a stake (usually money) on something with an intent to win a bigger sum, which can be considered gambling.

Gambling has been a topic of moral policing since ancient times and has been facing backlash from many states in India. The states have either banned it completely or regulated it (or are in process of regulating it). With easy and cheaper access to the internet, gambling has moved from land-based to online-based gambling, leading to mass penetration. States such as Telangana, Andhra Pradesh, Assam and Odisha, have banned online gaming (whether games of chance or games of skill) in an attempt to prohibit gambling. Since games of chance are likely to be construed as gambling, these are expected to face legal hurdles in these States. Further, states such as Sikkim, Nagaland and Meghalaya have legislations to permit and/or regulate online gaming, including licensing.

In the international arena, the UK has regulated gambling by way of specific laws governing gambling to regulate various aspects like defining gambling or betting, protecting vulnerable sections from being exploited by gambling, regulating age limits, imposing limits on stakes, fees, winnings, prizes, etc. In the USA, gaming laws are comparatively liberal and gambling activities are governed by Local, State and Federal level laws.

While a few Indian states may want to prohibit gambling, with changing times and the increase in the reach of online gambling, this may not be easy to achieve. There is a need to revisit the current approach, from a complete ban to regulating these activities. Also, States need to be mindful of the fact that in their attempt to ban/regulate gambling, the games that are primarily based on the skills and expertise of players should not suffer the axe.

While the online gaming industry faces legal and constitutional battles as indicated, they also have a long-drawn battleline with GST authorities over GST rate and valuation. On the issue of the applicable GST rate, the tax authorities argue that the highest rate of 28% is applicable on the entire amount collected by the online gaming companies, treating all online games as gambling. This issue circles back to the moot question, as to what constitutes a game of chance Vs. game of skill. There have been judicial pronouncements debating the matter in the case of games such as Rummy, Poker, Fantasy games and Horse-racing, which have been viewed as games of skill. However, the principle contained in these judicial pronouncements have to be evaluated and relied upon on a case-to-case basis and a straight-jacket application would be fraught with inherent risks.

On money pooled for distribution as prize money, tax authorities contend to levy GST, whereas, various High Courts have observed that, they are in the nature of actionable claim and therefore, no GST is applicable on it. Another matter which needs attention, especially from foreign companies providing gaming services to Indian end-users, is evaluation of whether their services would fall within the ambit of Online Information Database Access and Retrieval Services. This gains significance from a perspective of whether a foreign company is required to obtain a GST registration and follow GST compliances in India.

To address some of these GST issues relating to the online gaming industry, the Finance Ministry constituted a Group of Ministers (GoM) who conducted their meeting on 2 May 2022. In this meeting, the GoM arrived at a broad consensus on most of the issues, however, the conclusive view and the likely outcome of the same are expected very soon.

(Gunjan Prabhakaran is Partner & Leader Indirect Tax at BDO India and Payal Thaker is Partner Indirect Tax at BDO India. The views expressed are authors own.)

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Gaming vs Gambling, Skill vs Chance: Controversy surrounds the Gaming industry in India - The Financial Express