Online Games : Valuation & Classification of Service : GST Law of India
Athena Knowledge Sharing: AKS | 2021 | 4
Online
Games : Valuation & Classification of Service : GST Law of India
Moot
Questions
·
What is the Value of services provided by a
Company providing online platform to the Players participating in the online game?
·
What is the applicable rate of GST on the
services of providing platform for
online games?
A.
Example for convenience of discussion
1.
A online gaming Company M/s Jeeto Online
provides online platform services for conduct of games viz. ludo, carrom etc.
Rules of the game shall be such that the players shall pool Rs. 50 (say) each
in their own game's Players Pool Account. M/s Jeeto Online shall charge and
transfer 15% fees out of amount pooled by players, and balance would be
distributed among them as follows:
a.
Winner Rs.
100
b.
1st Runner Up Rs.
50
c.
2nd Runner Up Rs.
20
Rs. 170
B.
Classification of Service for rate of
tax
2.
The Hon’ble Supreme Court in the matter of
K.R. Lakshmanan (1996) 2 SCC 226 is of the view that:
i. the
competitions where success depends on substantial degree of skill are not
`gambling’; and
ii. despite
there being an element of chance if a game is preponderantly a game of skill it
would nevertheless be a game of “mere skill”.
3.
The Hon’ble Punjab & Haryana High
Court in the matter of Varun Gumber v. Union Territory of Chandigarh;
2017 SCC Online P&H 5372 has relied upon the judgment of
Hon’ble Supreme Court in the matter of K.R. Lakshmanan (supra) and held
that success in Dream 11’s fantasy sports basically arises out of users
exercise superior knowledge, judgement and attention and therefore it is a game
of skill and not a game of chance. SLP filed against this order has been
dismissed by the Hon’ble Apex Court.
4. The
Hon’ble Bombay High Court has also examined this issue in respect of online
Dream 11’s Fantasy Games in the matter of Gurdeep Singh Sachar, 2019 (30)
G.S.T.L. 441 (Bom.) and held
that the activity of Dream 11 do not amount to ‘gambling’ or ‘betting’ or
‘wagering’. In the said judgment the Hon’ble Court has observed that the
activities performed by ‘Dream 11 Fantasy Pvt Ltd’ do not involve any betting
or gambling as their result is not dependent upon winning or losing of any
particular team in real world on any given day. Since the Court has observed
that it's a online game not involving any gambling/betting, the Court has held
that same is chargeable to 18% GST. The judgement of Bombay High Court was
challenged four times before Hon’ble Supreme Court and details of such petitions
are as under:
i.
The Division Bench of Hon’ble Supreme
Court dismissed the SLP filed by Varun Gumber vide its order
dated 04.10.2019.
ii.
The Division Bench of Hon’ble Supreme
Court has dismissed the SLP filed by Gurdeep Singh Sanchar
vide its order dated 13.12.2019.
iii.
The Division Bench of Hon’ble Supreme
Court in SLP filed by Union of India vide its order dated
13.12.2019 made it open for Union of India to apply for a review before the High
Court of Bombay to decide GST aspect on merits. The Hon’ble Apex Court has further
vide its order dated 30.01.2020 clarified that the only scope of review before
the Bombay High Court is in respect to GST.
iv.
The Three Judges Bench of Hon’ble
Supreme Court in SLP (Criminal) filed by the State of Maharashtra vide
its order dated 06.03.2020 has issued the notice and stayed the operation of
the judgement and order passed by Bombay High Court until further orders.
5. Similar
finding was also given by the Hon’ble Rajasthan High Court in Chandresh
Sankhla, 2020 (42) G.S.T.L. 195 (Raj.). The Court finds that the issue
of treating the game “Dream 11” as having any element of betting/ gambling is
no more res integra and dismissed the PIL.
6. It
is to be noted that it is uncertain whether in the SLP filed by the State
of Maharashtra the Hon’ble Supreme Court will admit the SLP and re-open
the issue of the legality of Fantasy Games or will only delve into the issue of
taxability or will dismiss the SLP. However, after allowing the Union of India
to file review petition in respect to issue of GST before the Bombay High
Court, it seems unlikely that the issue of GST shall be taken up by the Apex
Court in SLP filed by the State of Maharashtra. Nonetheless, the
issue is unsettled and is under litigation.
7.
The games which predominantly require use
of skills and strategies by players to compete and win over others like Ludo,
carrom etc., the same can be classified as skill-based Games. Skill based games
are leviable to GST @ 18% under SAC 998439 on the value of amount charged by
Gaming Companies for its services.
C.
Valuation of services provided by Companies
providing platform for online games
8. Earlier,
the legality of Online Games in India primarily rests on the question that
whether such games are games of skill or games of chance. Now, the question
that took the lead was about the taxability of such online gaming services
under GST Law.
9. In
the matter of Gurdeep Singh (supra) one of the questions was raised by the
petitioner in regard to value of supply and he has submitted that Dream 11 is
paying GST only on amount charged towards platform fee (say 15%) whereas GST is
payable on 100% amount collected by the Company.
10. The
Hon'ble Bombay High Court in the aforesaid said case observed that the amounts
pooled by the participants is an 'actionable claim', as the same is to be
distributed amongst the winning participating members as per the outcome of a
game. The Court observed that since the activity of 'Dream 11 Fantasy Pvt Ltd'
does not amount to lottery, betting or gambling, the activity or transaction
pertaining to such actionable claim can neither be considered as supply of
goods nor supply of services as per Entry 6 of Schedule III of CGST Act, and is
thus clearly exempted from levy of any GST. A review application was filed by Union
of India in respect of GST and is pending before the Bombay High Court.
Dispute
on Valuation Issue
11. The
issue of valuation of services provided by Online Gaming platforms is pending
even before GST Council and the litigations have also started.
a. The
GST department has started questioning gaming companies to determine if GST is
applicable on the total transaction value or the net commissions that accrue to
these gaming firms.
b.
In view of representation received from
various associations, in 35th GST Council Meeting dated 21.06.2019,
the Group of Ministers (GoM) had recommended that the issue regarding rate and
valuation of Online Gaming and other miscellaneous issues be forwarded to the
Fitment Committee and Law Committee. Later in 38th GST Council
Meeting dated 18.12.2019 also, the issue was being requested to be referred to
Law Committee and it was also recognized in the Minute Book that litigations
are going on by Online Gaming Portals.
D.
Author's View
12. The
games which predominantly require use of skills and strategies by players to
compete and win over others like Ludo, carrom etc., the same can be classified
as skill-based Games.
13. Skill
based games are leviable to GST @ 18% under SAC 998439 on the value of amount
charged by Gaming Companies for its services.
14. In
the given example, the amount actually charged by M/s Jeeto Online for its
online platform services is 15% Fees collected and transferred out of pooled
amount of players. Therefore, in author's view GST should be levied only on the
portion of amount actually charged i.e. 15% Fees. However, as discussed, the
issue relating to Value of Service is contentious due to the following reasons:
a. The
GST department has issued notices to online gaming industry. It is also pending
before the Law Committee of GST Council for final decision;
b. The
issue is pending before the Hon’ble Bombay High Court in a review petition
filed by Union of India;
c. The
Hon’ble Supreme Court has also issued the notice and stayed the operation of
the judgment of Bombay High Court in SLP filed by State of Maharashtra.
15. Thus,
levy of GST on remaining 85% amount which pooled by Players and distributed
among players is subject to further outcome of the ongoing litigation.
16. It
is to be noted that the terms of agreement between prospective players and
Gaming Coming will play a crucial role in determining the GST implication.
Therefore, the concept and methodology of the game should come out clearly from
the terms and conditions pertaining to the games and Player's consent should be
taken on the terms and conditions of the games.
Adv. (CA) Pawan Arora
Partner, Athena Law
Associates
88000 91636, pawan@athenalawassociates.com
CA Shivi Agarwal
Associate, Athena Law
Associates
Date:
19.05.2021
Analysis on this issue done by the Authors is also published by Taxmann in November 2020 as an Article.
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