Online Gaming: The Missing Role Of GST Council

One of the most touted rationales underlying the introduction of Goods and Services Tax was the heartfelt necessity for reforming the seven-decade-old archaic indirect tax regime. One of the key issues facing the pre-GST regime was the dichotomy and overlap between ‘goods' and ‘services', which was further confounded by classification and characterisation issues resulting into multiple taxation of supplies.

To illustrate, software was treated both as goods (hence subject to VAT) and services (hence liable for service tax), which resulted into cascading tax-effect for consumers and compliance issues for businesses. It was hoped that such woes would automatically obviate in the GST regime, it being a harmonised tax on supply of both goods and services.

The public-imagination stirring recent decision of the Karnataka High Court decision in Gameskraft, which quashed a mammoth GST demand on online gaming activity, reveals that certain foundational issues continue to remain unaddressed. 

At its core, the decision deals with classification of online games, which further hinges upon decades-old judicial rules which distinguish between ‘games of chance' versus ‘games of skill', the former being susceptible to treatment as betting and gambling activity.

The difference is that this old classification debate is in the context of the digital avatar of these games. The classification debate gets conflated into a tax dispute as betting and gambling activity is subject to GST. Hence, whether the gamers are gambling on the online gaming platform becomes a tax issue. This is further compounded by the exclusion from the scope of GST extended to actionable claim—a nebulous concept understanding which requires a centuries-old jurisprudential inquiry. 

The decision of the high court accepts the legal challenge to a GST demand—a whopping Rs 21,000 crore—sought to be recovered from an online gaming entity. One way of addressing these events is that it reveals the potential of the Indian economy and, hence, the bulging figures. Nonetheless, it is just another tax dispute. Such stance would be inclined to leave the determination to the courts; the logical next step being to expect a high-pitched complex legal battle awaiting determination by the Supreme Court. However, such approach would do a disservice to the very foundational premise of GST. 

A genuine question arises—if the GST regime permits a clean-slate reform, then why are its rules so complex that businesses require judicial intervention to understand their obligations?

At a larger level, this development reveals a similar past anomaly where the policy space is ceded to the courts. It is essentially to address such situations that the role of GST Council gains prominence.

It is no mean feat that a Constitutional institution with a recommendatory role has been envisaged to guide both the centre and states to work towards "a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services". This constitutional mandate overarchingly highlights the aspirations of the policy-makers to define GST as a dispute-free tax regime. In fact, even the Supreme Court in its famous VKC Footsteps decision of 2021 urged upon the council to revisit the policy resulting in GST refund woes to exporters. 

There is another reason for highlighting the missing role of GST Council in the context of the Karnataka High Court decision. The build-up to the dispute reveals that the GST Council has been grappling with the issues inter alia relating to taxation of casinos, race courses and online gaming for years now, having constituted a specific ‘Group of Ministers' to address policy options but without a resolution in sight.

Such lagged inaction does not auger well with the entrepreneurial spirit and business sentiments where time is a crucial decision-making variable. However, more crucial than these aspirational pangs for the optimality of the taxation structure, is the very premise of GST. It is an indirect tax, which means the incidence of the tax is on the consumer. By default, this requires that the service provider must be aware of the tax consequences such that they can be built in the price and recovered from the customer at the time of the transaction.

Thus, any post facto guidance or change of rules is antithetical to the foundational logic of a consumption tax as the business is unable to recover it from the consumers (especially in an unorganised market of online gamers in this case) which, in effect, translates this indirect tax into a tax on the income of the gaming entity. 

The government is leaving no stone unturned to incentivise business environments but the time-lag in evolution of the tax policy is clearly proving to be a deal breaker, as the stakes in the decision reveal, which in fact is only of one entity. It would in fact be hazardous to venture a guess in the real stakes involved, especially when the online gaming industry is being considered a sunrise sector expected to create millions of jobs and give a push to the national economy.

Conversely, demands ranging in such gigantic figures are not just high enough to wipe out the entire net worth of the subject entity but in fact unleash deterrence amid the industry players. This is overwhelmingly sufficient to make them seriously consider relocation of their business. In brief, the taxation of online gaming presents itself as a quintessential illustration to the many open fissures which call for a proactive policy solution lest the reformative GST paradigm be riddled with disputes.

In the quest for tax revenue, let's not kill the goose which laid the golden eggs.

Tarun Jain is an Advocate at the Supreme Court of India and a tax controversy expert.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.