Bad beat : Online gaming subject to both 28% GST and 30% TDS and applies to foreign providers

From 1 October 2023, online gaming companies are required to charge a 28% Goods and Services Tax (GST) on the full value of bets. In addition, foreign online money gaming companies (FOMGCs) are required to register for GST and collect tax in India.

These measures were included in amendments to the Central Goods and Services Tax laws, which received Presidential assent on 18 August following a lengthy deliberation of tax rates and valuations and a recommendation by the GST Council that a 28% GST be levied on the entire amount deposited by a player rather than on individual bets. The final structure also treats games of skill and games of chance equally, as opposed to treating them separately with respect to tax rates and valuation.

Importantly, it should be noted that from an income tax perspective, even before the GST changes, the online gaming industry was burdened by the requirement that a 30% tax be deducted at source (TDS) on a player’s net winnings. The previous threshold of INR 10,000 to trigger the tax was eliminated on 1 April 2023 so all winnings from online gaming are subject to the withholding tax. The addition of a 28% GST to this tax burden likely will have negative consequences for the industry.

Highlights of changes

Specific provisions for valuation have been introduced to provide that the amount deposited with the online gaming companies would be subject to the 28% GST. The rules also provide that even if any amount is refunded by the gaming company, the refund may not be reduced from the value of supply to compute tax liability. However, any amount placed as a bet from winnings in earlier games would not be subject to a new levy and the tax liability would be computed only on the amounts deposited by the player and not on individual bets.

The amendments include some new definitions in the GST law. For example, “online gaming" is the offering of a game on the internet or an electronic network and includes “online money gaming.” “Online money gaming” is defined as online gaming in which players pay or deposit money or money's worth (including virtual digital assets) with the expectation that they will win money or money's worth (including virtual digital assets) in an event, regardless of whether the outcome or performance is based on skill, chance or both. The definition of a “supplier” is revised to provide that gaming operators/electronic platforms will be deemed to be suppliers.

Under the new rules, FOMGCs that have subscribers/users/players in India must register for GST purposes and pay the 28% tax on amounts collected from Indian players over to the Indian tax authorities. Alternatively, a FOMGC may appoint a person to represent it in India and undertake GST compliance obligations, including registration. It is important to note that the amendments confer power on the government to block access to online platforms in cases of noncompliance.

Considerations for FOMGCs

FOMGCs should become familiar with the new rules and take the following into account:

• The GST registration requirement (or appointing a fiscal representative);
• The need to develop a mechanism to record details of players from India and possible adaptation of internal systems to identify collections from such players to determine the tax liability;
• The need to determine the time and value of supplies;
• Record-keeping requirements under the GST laws;
• Commercial issues, such as revisiting the prize pools;
• Providing information on their websites to the effect that (i) tax will be withheld at source on net winnings regardless of the amount; (ii) the incidence of withholding tax at the time of withdrawal if that precedes the year-end; and (iii) the withholding tax rate that will be applied;
• Implications of the Central Government’s rules regulating online gaming;
• The tax implications of refunds to players;
• The interplay of the data collection requirements under the new data privacy law and the GST laws;
• The impact on operations considering the prohibition of real money gaming in a few Indian states; and
• Potential historical period demands under GST, and consequent disputes.

Way forward

Online gaming, casinos and horse racing companies are now subject to the 28% GST on the amounts deposited by the players, as well as the 30% TDS on a player’s winnings. This combined tax burden likely will inhibit the growth of the online gaming industry and impact player earnings and motivation. While revenue to the GST kitty will see an uptick, player’s net winnings will shrink, thereby decreasing the TDS/income tax collections.

FOMGCs should assess the impact of the new online gaming laws on their business operations and determine a way forward for assessing and meeting their compliance obligations in India and also may need to consider revisiting the terms of their agreements with players.