Bad Beat : Online Gaming Subject To Both 28% GST And 30% TDS And Applies To Foreign Providers – Withholding Tax

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.

Originally published 10 October 2023

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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