Skill-Based gaming companies face regulatory challenges every now and then. There are new growths and persistent issues in the tax landscapes that govern all businesses in India, including online gaming companies.
Recently, the online gaming sector has attracted players, investments, and more scrutiny. Unfortunately, the online gaming industry does not have Services Accounting Codes (SAC) allocated to them.
The tax department tried to classify the online gaming industry under the ‘gambling and betting services including similar online services’ category, not keeping in mind the courts have clearly excluded skill-based online gaming from the domain of gambling.
This led to needless controversies over the classification of such games and the rate applicable to them. Due to the recent times and settled cases, better sense has prevailed and misinterpretation has disappeared.
Tax on Advance Income
The skill-based gaming industry work by letting its customers deposit cash upfront. The players can use this amount to play games on online platforms. The cash paid in advance will be taxable once the company receives it.
“Since the advances received from players will all result in eventual income for the operator should discharge liability at the time of receipt of such advances. Careful structuring of flows within the operator’s system and an understanding of the relevant provisions is critical to avoid unnecessary tax litigation on this matter,” a government official quoted.
Services Subject to Tax
The operator of these online games will receive tax consideration under GST for services provided such as entry fee, tickets, and upfront payment. These are significantly grey areas and have the potential to give rise to tax disputes and prolonged litigation.
All payments made or to be made for the inducement of supply of goods and services will be taxed. For instance, if a player enters an online IPL fantasy game and pays Rs 500, then, according to the provision, the full sum will be exposed to GST even if the cash flows into the prize pool. As operators earn a small margin of entry fee, imposing GST on the entire amount eviscerates the revenue model.
Earlier, lotteries, betting, and gambling were not under the purview of the GST regime. Hence, the entry fee charged was analogous to an actionable claim. Now, these games are subject to GST at a rate of 28%.
Further, non -resident operators of such games have to struggle with registration and payment of GST under the rules for non-resident registered taxpayers, which carry a different set of issues such as pre-payment of taxes and interplay with direct taxes. The difficulties for this early rising industry are not prone to end soon.
If a gaming company is under the direct taxation realm, then it will witness issues under GST since information gets exchanged between the direct tax and GST departments. The major challenge from a direct tax viewpoint is posed by the nuances of Section 194B of the Income Tax Act, 1961 prescribes the method and quantum of tax deduction on winnings from skill-based games.
Since key terms such as ‘rewards’ and ‘game’ have not been characterised in the charging law. There numerous legal choices pointing in varying ways concerning the right utilisation of the law on withholding of taxes on rewards from such online games.
Without any elucidations from the administration, this regulatory mist will stick around the skill-based gaming industry for some time.