Tax authorities seek data of Indian users from offshore online gaming companies

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The Indian tax authorities have contacted about half a dozen online gaming companies in Malta, the UK, and Gibraltar to obtain data on the number of players from India and the amounts they have spent.

The communication from the divisions of the Central Board of Indirect Taxes and Customs (CBIC), which oversees the goods and services tax (GST), are not general notices that can only be served to a foreign business in accordance with a different protocol.

“The letters were sent about six weeks ago. They (tax officials) are trying to get a sense of the extent of money that is finding its way to offshore gaming companies. We don’t think these foreign firms keep separate records of users from various countries,” a source said in a statement to The Economic Times.

Usually, a single indirect tax, GST, which came into effect on July 1, 2017, is often paid on a reverse charge basis by service importers. However, a supplier based outside of India is responsible for paying taxes in cases where online information and database access or retrieval services (OIDAR) are imported by unregistered, non-taxable recipients.

It is practically impossible to track and identify residents sending money overseas to gamble or play on online platforms as the transactions are low value and high volume in nature.

“Most are using international credit cards. Few may be using the money that was earlier sent abroad under the liberalized remittance scheme (LRS) and has been lying in a foreign bank account…No way would one get to know such fund transfers,” according to a tax practitioner who advises some of the companies.

Contrary to domestic corporations, where the GST threshold is Rs 20 lakh, many cross-border services are subject to taxation without any cap. If the tax authorities determine that GST was “intentionally avoided,” a 15% fine may be assessed.

Without any face-to-face interaction with the seller, OIDAR services are purchased online and delivered to the recipient online. This definition states that automated services with little to no human involvement are subject to an 18% GST. As a result, GST would apply to any services provided by an international gaming or cryptocurrency platform.

But sending a notification to a platform abroad is outside the purview of the Indian tax authorities. Such letters must go through the Ministry of External Affairs through its counterparts in that country, as per the international law.

Thus, the letters that are being sent out right now are a request from the tax department. Since the emails are “queries” rather than tax notices, a top tax official agreed to sending them to overseas offshore gaming companies.

“We have sent queries to some online gaming companies and we have received few responses,” an official said. The official added that dealing with offshore online gaming organizations was becoming more challenging for them, and the Income Tax Department supplied some player databases, according to the official.

The officials also said that the loopholes and a lack of clarity about GST on online gaming make it simpler for foreign gaming platforms to dodge tax. The estimated amount of GST that the local online gaming companies have evaded between April 2019 and November 2022 is Rs 22,936 crore, while experts believe the actual amount might be substantially higher.

Additionally, there are different viewpoints on whether residents who transfer money to these online sites are breaking the Foreign Exchange Management Act (FEMA). A senior lawyer said, “Clearly, LRS cannot be used for gambling. But what if the user calls it a ‘profession’?”.

A blanket ban on online gambling was found to be unconstitutional earlier this year by the Karnataka High Court. According to the court, this violated Article 19(1)(g) of the Constitution which concerns with the freedom to “perform any profession or to carry on any occupation, trade, or business.”

To raise awareness and sensitize offshore gaming companies about how they would be required to pay tax in India, information on GST was sent to a number of them in June and July. More detailed data is intended to be collected through the sending out of the most recent batch of letters.