Draft Amendments to GST Act to clarify rate of 28% on face value sent to states

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The recent announcement made by the GST Council has disappointed the entire online gaming industry who believe that many companies will now face a heavy tax burden and slower overall growth.

The Council did not make any difference between skill-based and chance-based games, and the companies will have to pay 28% GST on full face value amount as soon as amendments are made to Entry 6, schedule III of the Central GST Act to classify online gaming as an actionable claim.

For that purpose, a draft of the amendment has been shared with the states for feedback and is anticipated to be introduced during the monsoon session of the Parliament, starting July 20.

In an interview, revenue secretary Sanjay Malhotra said, “The 28% tax was always the case in online gaming. Today’s decision made by the GST Council is only to clarify it and put an end to this debate.”

The statement holds significant importance given that there has been a recent case regarding tax uncertainty involving Gameskraft who were slapped with a showcause notice by the GST department in September last year, demanding Rs 21,000 crore in tax.

According to the GST department, the services provided by the company came under gambling and betting which attracts a tax rate of 28%. A legal battle ensued between Gameskraft and the GST department regarding the nature of its services.

Finally, in May, a single-judge bench of the Karnataka High Court quashed the notice by the GST department and ruled games provided by Gameskraft as games of skill.

The Internet and Mobile Association of India (IAMAI) also released a statement on the matter saying, “The net effect of this levy will result in an approximate 1,000% increase in GST on the industry and will cause irreversible damage to the $2.5 billion investments in the Indian online gaming startup ecosystem and lead to a complete halt on any prospective FDI.”

The group defended online gaming and quoted that there is a distinction between skill games and chance games and claimed that having a similar tax policy will “dent the burgeoning online gaming sector but will also threaten to make the entire $20 billion Indian online gaming sector an unviable business model”.

Commenting on the developments, chief strategy advisor at Gameskraft, Amrit Kiran Singh said, “Companies will be forced to set up shop abroad. They were creating jobs, and right up to this point, everything was being done to support the online gaming industry.”

“One of the options that we will give a serious look at will be a legal recourse. It’s a little early to decide… but we will definitely talk to other big players in the industry and decide what we need to do,” he added.

Companies believe that the heavy tax burden would most likely push consumers away to illegal offshore betting services that pay no tax to the government and potentially dent the revenue collection.