Taxation Law

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION In the Budget 2022, the Finance Minister introduced a provision to impose income tax at a rate of 30% on profits obtained from the transfer of virtual digital assets (VDAs), although a clear provision still lacks, an attempt to shed clarity on VDAs and their exchange has been made. To that, this piece provides an in-depth analysis of the tax implications surrounding direct and indirect taxation, specifically focusing on the complexities involved in determining the taxable nature of winnings, including digital assets such as bitcoins and tokens, that are received as rewards from online games. Further, the article explores legal literature surrounding the skill-chance dichotomy inherent in online gaming and contributes to the existing discourse around technology driven transactions as rewards. VDAs UNDER INCOME TAX ACT Previously, income earned from cryptocurrencies was taxable based on the nature of the activity. Individuals involved in cryptocurrency investment were taxed under Income from Capital Gains or Income from Other Sources, as per IRS provisions. On the other hand, individuals engaged in cryptocurrency trading were taxed under Income from Business/Profession. However, this classification changed with the introduction of the Finance Bill, 2022.The author believes, considering the unique characteristics of online gaming in India and the necessity for specific regulations regarding taxation, the government has taken steps to address this, however a clear framework still lacks. In terms of income tax, if an individual sells bitcoins received as gaming rewards, the resulting gains would be taxable. The tax treatment of these gains can vary depending on the intent of the individual, whether they classify the gains as business income or capital gains. Previously, there was no dedicated provision for the taxation of online gaming. Instead, Section 194B of the Income Tax Act (ITA) was applied, which dealt with TDS deduction by person who is “responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees.” Additionally, Section 194BB covered TDS deduction for horse racing and wagering. Furthermore, Section 115BB of the Act imposed a 30% tax rate on winnings. Though these provisions existed, it failed to provide an exact framework involving technology driven transactions or a settled position of earnings from games, be it that of skill or of chance. The Finance Bill 2023 introduces two new sections under ITA to regulate winnings from online gaming: Section 115BBJ: This section states that net winnings from online games will be subject to a 30% tax rate, effective from April 1, 2023. Section 194BA: This section mandates the deduction of tax at source at a rate of 30% on winnings from online games, effective from July 1, 2023. Together, these provisions signify the government’s intent to establish a comprehensive framework for taxing and regulating winnings from online gaming. The introduction of specific tax rates and the requirement of tax deduction at source aim to facilitate better monitoring, compliance, and revenue generation in the evolving landscape of online gaming, primarily under direct taxation provisions. VDAs UNDER GOODS AND SERVICES TAX (GST) GST Act lays no specific definition for cryptocurrencies or digital assets, new provisions provide that VDAs cannot be classified as money or securities and are considered as goods for GST purposes. Additionally, the Central Board of Indirect Taxes and Customs (CBIC) has opined that cryptocurrencies are not treated as currency but rather as goods or services, which is important to note as currency is not taxable under the same, while goods and services are subject to taxation under different slabs. Crypto-related activities, including mining, exchange services, wallet services, payment processing, barter systems, and other transactions, require classification as either goods or services to determine the appropriate treatment. However, for determination of tax rates, there is no specific Harmonized System of Nomenclature (HSN) code for digital assets. However, HSN code 960899, which pertains to other miscellaneous articles, is often used with an applicable GST rate of 18%, the highest in that category. To understand how this is implemented, it is important to delve into the skill versus chance discourse. In a significant development last year, the Online Gaming Industry faced a major upheaval when the Department issued a Show Cause Notice to Gameskraft, demanding an extraordinary sum of Rs. 21,000 crores taxing as Goods at a rate of 28%, however, the Karnataka High Court delivered a landmark judgment addressing the concerns related to the key questions in the GST-related litigation for the Online Gaming Industry are: Skill-based or chance-based: Are the games considered skill-based or games of chance (betting/gambling)? Taxable amount: Should GST be levied on the full amount pooled by players or only on the platform fee charged by Online Gaming Platforms? Addressing the first prong, the Supreme Court established that competitions requiring a significant degree of skill are not considered gambling. If a game is primarily based on skill, even if it involves an element of chance, it is classified as a game of ‘mere skill.’ The Court relied on the Supreme Court’s judgment and determined that Dream11’s fantasy sports predominantly rely on users’ superior knowledge, judgment, and attention, making it a game of skill rather than chance. Similarly, the Bombay High Court analysed Dream11’s Fantasy Games and concluded that they do not involve betting or gambling since the outcome is not dependent on the real-world performance of any particular team on a given day. Rajasthan High Court reached a similar conclusion and dismissed a Public Interest Litigation, stating that the issue of treating the game ‘Dream11’ as involving betting or gambling has already been settled. As for the second limb, the target of taxation, in the context of GST, can vary depending on the specific circumstances and regulations of a particular jurisdiction. However, in general, both players and the platform can be subject to GST. Players may be liable to pay GST on

[By Reet Balmiki] The author is a student of NALSAR University of Law.   Introduction With the Union Budget 2023-24 being presented, the Finance Bill 2023 proposed key amendments to the provisions concerning the taxability of winnings from gambling under the Income Tax Act, 1961 and introduced separate provisions to govern online ‘games.’ This move proposed by the Union is in response to the increasing uncertainty in regulating online ‘games’ due to state-wise regulatory mechanisms. While certain states have imposed a blanket ban on all online games played for a stake, others have chosen to regulate the industry through a partial ban. Additionally, the imposition of a complete ban also results in the legislature blurring the distinction between games of skill and games of chance and, in effect diluting the judicial test of ‘preponderance of skill.’ Undeniably, the online gaming industry has cemented its place among the most prosperous sectors in the rapidly growing digital economy. Consequently, a consistent and transparent policy regulating the burgeoning industry while appreciating its contributions to the Indian economy is a pressing need. This article has three objectives: First, it sets out the evolution of the law related to gambling through courts and the legislature; Second, it discusses the controversy surrounding the legislative competence of the recent state laws/ordinances on the subject; Third, it traces the policy implications of the proposed amendments in the Finance Bill, 2023. Tracing the evolution of the meaning of ‘Gambling’ The debate over the gamut of ‘Gambling’ has dual significance, first, it lays down the foundation for the rational distinction between games of skill and chance which is the focal point of the debate over online gaming, and second, it defines the extent of regulatory jurisdiction of the state legislatures and lies at the heart of the recent controversy over the classification of online gaming. This section briefly traces the judicial interpretation of the term and the jurisprudence attached to it. The judicial foundation was laid down for the first time in the case of State of Bombay v. R.M.D. Chamarbaugwala, (“Chamarbaugwala”) where the Supreme Court deliberated upon the Bombay Price Competition Tax Act, and referred to the definition of ‘Price Competition’ under Section 2(2) and held that any game which does not substantially depend on the exercise of skill constitutes ‘gambling.’ This reasoning was applied explicitly as the test of preponderance in the K Satyanarayana case. Here, the Court categorized Rummy as mainly and preponderantly a game of skill with only a certain element of chance, thus distinguishing it from chance-based ‘gambling.’ This test was further concretized in the K.R. Lakshmanan case, where the Court was faced with determining whether horse riding is a ‘game of skill’ and consequently saved by the exemption clause in the Madras Gaming Act, 1930. Here, the Court substantiated the ‘preponderance of skill’ test from Chamarbaugwala and concluded that games based on a substantial degree of skill (including games of mere skill or predominant skill) shall not constitute ‘gambling.’ The judicial categorization into predominantly skill-based and purely chance-based games does not foresee the possibility of a purely skill-based game, as evident in MJ Sivani. This conceptual vacuum results from the judicial non-consideration of differentiation between the ‘chance’ factor in a game and the element of ‘accident.’ Contrary to this, the Public Gambling Act, 1867 and state legislations have categorized these games into: games based on ‘mere skill,’ games based on ‘mere chance,’ and mixed games of skill and chance. It is only the games of ‘mere skill,’ with the possibility of ‘accidents’ but no ‘chance’ factor, which are exempted from the prohibition under gambling laws. Therefore, while mixed games where skill is predominant are allowed as per the judicial test, many state legislatures have sought to ban these. One prominent example is the Explanation to Section 15 of the Telangana State Gaming (Amendment) Ordinance, 2017, which refuted the judicial interpretation of Rummy being a skill-based game because of the luck/chance factor. However, this position is inconsistent among the states and indicates a broader policy gap. Legislative Competence for regulating Online Gambling: prerogative of the States or Union? Moving forward, it becomes noteworthy that nothing in the Constitution prohibits the legislatures from overriding the judicial interpretation of ‘gambling’ through a clarificatory amendment, provided the legislative body has the requisite competence. In this light, the controversy surrounding the definition of ‘gambling’ further intensifies in the case of ‘online gambling’, which has increasingly become susceptible to state regulation. In the scheme of federalism, the legislative powers have been defined under Schedule 7, where Entry 34 of the State List gives states the legislative competence to make laws on ‘Betting and Gambling.’ However, with the Karnataka Police (Amendment) Bill, 2021, and the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 banning online skill-based games, the challenges to the legislative competence of states over such gambling laws has been a prominent issue. Two aspects become relevant; first, whether Entry 34 needs to be read expansively to include ‘games of skill’ and second, whether a liberal construction of Entries under the State list permit such a ban. The Tamil Nadu Amendment was challenged in Junglee Games case, where the Petitioners contended the competence of the State Legislature to impose a blanket ban on all online games for stake, including ‘games of skill.’ The contention here lies at the crux of our discussion. Firstly, the State attempted to take an expansive view of ‘gambling’ and ‘betting’ under Entry 34 to include any game played for a stake. However, the rational distinction between games of skill and chance cannot be diluted to such an extent as it goes to the very root of competence. An over-expansive reading of the Entry would change the very meaning of the entry, thus being held impermissible. Secondly, the amendment to Section 11 to undo the exemption clause for games of ‘mere skill’ further diluted the preponderance test by imposing a blanket prohibition. Per R. M. D. Chamarbaugwala, ‘games of skill’ form a different class

[By Abhishek Bhatra] The author is a student of National Law University and Judicial Academy, Assam.   Introduction The treatment of Works Contract in the Pre-Goods and Service Tax (GST) era subjected the Service Provider to a variety of indirect taxes such as Service Tax, Value Added Tax (VAT), and Central Excise. However, if the Works Contract was awarded by the Government, a Government Authority, or a Local Authority, the Service Provider was given the liberty to claim exemption from the applicable Service Tax. With the implementation of the GST Regime, the erstwhile exemption under the Service Rate notification 25/2012 for Government Contractors has been done away with. Furthermore, liability towards GST for Works Contract is now imposed on the ‘Time of Supply’. This reform has opened up a pandora’s box for the various Service Providers who had been awarded a Works Contract by a Government body in the Pre-GST era but had executed the said work – either partly or wholly – in the GST regime, as to on whom the burden of the additional tax liability shall be imposed. This article explores this lacuna in light of the legislative actions undertaken and the judicial position established, whilst presenting comprehensive solutions to resolve this conundrum. The question of law involved The immediate impact of the GST regime has been the clubbing together of all the applicable different indirect taxes, and now Works Contracts are taxed under a single head – on the entire amount – at a uniform rate, which has been divided into three slabs, namely, @18%, @12%, and @5%, depending on the nature of the works executed. The liability to pay GST for Works Contract executed is determined on the basis of ‘Time of Supply’ –under Section 13 read with Section 31 of the CGST Act – which constitutes the date on which supply of the services is deemed to have been rendered. In case the invoice is raised within the prescribed period of 30 days, then the date on which invoice is issued by the Service Provider or the date on which he receives the payment – whichever is earlier – is deemed to be the ‘Time of Supply’. And if the invoice is not raised within 30 days, the date of completion of service would be deemed to be the ‘Time of Supply’. Another integral transposition has been the discontinuance of the distinction between the works contract awarded by a government body and the works contract awarded by a private entity with respect to the Service Tax exemption provided to the former. Consequently, after the GST regime came into effect, Government bodies were hit with a deluge of representations from the various under contract Service Providers regarding the extra financial burden imposed because, as per ‘Time of Supply’ they would be liable to pay taxes under the GST regime even though they had prepared and submitted their bids taking into consideration the erstwhile taxation rates. This gave rise to a pertinent question of law as to on whom the burden of such differential tax liability must be affixed, because standard works contracts stipulate that the bid price quoted shall be inclusive of any State or Central Taxes. Steps taken hitherto To overcome this impediment, the Central Public Works Department, the Ministry of Railways, and various State Governments, such as Kerala, Tamil Nadu, West Bengal, Andhra Pradesh, Bihar, Orissa, as well as various departments under the Karnataka and Chhattisgarh governments, took into consideration the plight of such Service Providers and consequently issued clarifications vide Government Orders, Gazette Notifications, Circulars, and Standards of Procedure. There was also Judicial Activism for the purpose of resolving this impediment. For instance, the Hon’ble High Court (HC) of Jharkhand, in the case of M/s Sri Sai Krishna Constructions v. State of Jharkhand and Others, had vide its order dated 16.03.2021 directed the State of Jharkhand to formulate guidelines on this issue, in compliance of which the State had accordingly issued requisite directives for dealing with this matter. These steps, although beneficial, nonetheless encountered a series of difficulties for their effective enforcement, negating the intent behind introducing them because many aggrieved Service Providers could not get the intended relief, due to inefficacious redressal by the State Departments, and thereby had to seek judicial intervention in the process. For instance, in the case of M/s D.A. Enterprises v. State of Chhattisgarh and Others, the State Government had refused to accept the request of the aggrieved Service Provider for refund of the additional tax burden – by failing to abide by its circular – upon which the Service Provider had to file the instant writ petition seeking the Hon’ble Chhattisgarh HC’s intervention for claiming relief. A similar situation was presented before the Hon’ble Madras HC in the matter of Subaya Constructions Company Limited v. Tamil Nadu Water Supply and Drainage Board and Others. wherein the treatment of additional tax burden was processed under the third method of calculation, whereas it was contended by the Service provider that it should have been under another method. The Hon’ble Court, after considering the submissions, ruled in favor of the Service Provider. At this juncture, there still exists a vast majority of states that have yet to adopt effective measures for the purpose of overcoming this impediment. In such states, the only mechanism for redressal available to the aggrieved Service Providers is the long and expensive route of litigation. Resolving the conundrum Since the erstwhile VAT was a state subject under the Seventh Schedule, it is integral that the remaining states implement the requisite clarifications or guidelines for dealing upon this aspect, and the existing states should revise their clarifications or guidelines, through appropriate policy decisions, for effective enforcement and redressal. Firstly, it must be ensured that a uniform guideline is issued that is applicable for the Works Contracts entered into by all the authorities and departments of a particular state prior to the commencement of the GST Regime. This is pertinent in view of the question

[By Priyansh Sharma & Sejal Gupta] The authors are students of Institute of Law, Nirma University.   Introduction Unleashing the power of collaboration across geographical boundaries, secondment of employees has become a prevailing tradition between entities spanning different locations to send employees over, be it for temporary ventures or on project basis. However, amidst this intriguing tale, the tax landscape unveils its ever-changing twists and turns. Picture this: In the month of May 2022, the Apex court took centre stage, with its ruling in the C.C. C.E. & S.T. Bangalore v. M/S Northern Operating Systems (‘NOS’). With an authoritative voice, it declared that the secondment of employees from global entities to their domestic counterparts falls under the enchanting spell of service tax. Why, you ask? Because, dear friend, all the essential elements for a taxable supply found their harmonious rhythm in this captivating performance. Section 65(68) of the Finance Act, 1994 defines manpower recruitment or supply agency as “any service provided in context of hiring and supplying manpower, either temporary or permanent.” As stipulated under the Indian Contract law, a valid contract must constitute a lawful consideration, similarly an essential component of a supply of service is the ‘consideration’ received in return of that service which can be monetary or non-monetary. In the context of cross border secondment under Schedule III (1) of the Central Goods and Services Tax Act (‘CGST’), 2017, one major contention of the host entity is that it is the employer of the seconded employees during the period of secondment and the GST liability is therefore not arising. It is significant to observe that in an attempt to settle the issue whether secondment of highly skilled workers from the foreign entity to a host entity attracts service tax to be paid by the service recipient i.e., the host entity through Reverse Charge Mechanism (‘RCM’) under Section 9(4) of the CGST Act, 2017, the Supreme Court (‘SC’) settled the jurisprudence pertaining to this, however, there are still grey areas to be filled. Misjudged Interpretations The SC in the NOS judgement noted that although the Indian entity is having managerial control over the seconded employees, the said employees continue to be employed by the foreign entity due to the reason that the seconded employees had to leave for their original employers after the period of secondment is extinguished. The valid question of fact here should be that what relationship the seconded employees and the Indian entity holds during the secondment period, irrespective of these employees’ relation with their original employers before and after the secondment period. The Karnataka High Court had affirmed with this point of view in its recent ruling in M/S Flipkart Internet Private v. The Deputy Commissioner of Income . One more observation made by the SC was that the foreign entity was paying salaries to the seconded employees during the course of secondment. As per the agreements entered by the Indian and foreign entity, the seconded employees will be receiving remuneration from the foreign entity for the availment of social security benefits accrued in their home countries. These payments were later claimed as reimbursements from the domestic entity. One would argue that the seconded employees remained under the employment of the foreign entity due to the said setup of salary disbursement. However, the SC had answered this contention in the judgement only. It was observed that, receiving social security benefits from their home country is a legal requirement under the relevant international laws. It signifies that creating such a setup for salary disbursement is a mandate rather than discretion. It is pertinent to note that the Mumbai tribunal for Customs in M/S Volkswagen India (Pvt.) Ltd. v. Commissioner of Central Excise, has ruled that the nature of transaction cannot be determined by the method of salary disbursal, which effectively concludes this point of discussion that, receiving the money from foreign entity does not affect the relation of the seconded employees and the Indian entity which should be of ‘employee-employer’ in this context. Reimbursements: A Tangled Web of Confusion Section 67 of the Finance Act, 2006 provides for the valuation of taxable services for charging Service Tax. It stipulates that the gross amount of the service is taxable. It means that reimbursements, which are claimed by the service providers from service recipients in receipt of expenses incurred by the former while providing the service will be excluded from ascertaining the taxable value of service. The picture becomes inverted with the introduction of Service Tax (Determination of Value) Rules, 2006. It includes all such expenses which are incurred by the service provider while providing service i.e., reimbursements, under the ambit of taxable amount. In 2012, the issue of whether reimbursements would be considered while calculating tax liability on services was dealt by the Delhi High Court in Intercontinental Consultants & Technocrats P. Ltd. v. UOI, wherein it observed that reimbursements are not for services per se, but for the expenses for providing services, therefore these are not to be considered while computing the taxable value. The above-mentioned Service Tax Rules were declared inconsistent with Section 67 of the Finance Act. However, since 2015, with the amendment in the definition of ‘consideration’ in the Finance Act to include ‘reimbursable expenditure’ in the value of service, it muddles the legal position which was settled before. In 2018, the SC, while again considering the same issue, in Intercontinental Consultants & Technocrats P. Ltd. v. UOI, has reiterated the position which was held by the Delhi High Court in 2012. This effectively signifies that the validity of the amendment brought forward to alter the definition of ‘consideration’ holds no value post this judicial precedent. The position related to reimbursements were deemed to be settled, however the dilemma of misinterpretations on this issue exists since the ruling of NOS. The SC has held that the foreign entity has seconded its highly skilled employees to the Indian entity and the said setting is a ‘supply of manpower service’ and due to

[By Riya Sharma] The author is a student of Institute of law, Nirma University.   Introduction The realm of international tax law is nowhere defined with its treacherously advantageous nature in the Indian income tax system. It also spans the complex web of virtual currencies that are used in the digital world. This complex scenario creates a predicament where residents of one country may earn income from foreign sources, leaving both nations with legitimate claims to tax that wealth and the power to enforce their respective rights. Inevitably, this situation leads to a potential loss of revenue as either country may need to relinquish its right to levy taxes on such income. The G20 meeting brought forth discussions on the mounting apprehensions surrounding digital virtual currencies and their consequential market.[1] As a response to these emerging needs, a committee report was released, delving into an analysis of the digital currency market, notably addressing the aspect of taxation.[2] However, the current scenario reveals a fragmented landscape, with each country independently formulating tax laws pertaining to digital currencies. Consequently, a notable gap persists in the domain of international law and to adequately handle this changing paradigm, its development is required through the establishment of comprehensive and coordinated international tax frameworks. International collaboration and the development of unified guidelines can contribute to a fair and efficient system, ensuring that tax obligations are appropriately addressed without creating undue burdens or revenue losses for any country involved. Navigating The Challenges The taxation of Virtual Digital Assets (VDAs) presents two primary challenges that require international tax law guidance. Firstly, in cases where a transaction involves two countries and the Double Taxation Avoidance Agreement (DTAA) is silent on the taxability of such income, it becomes unclear which country has the right to tax the income generated.[3] Due to the conflicting nature of the relevant jurisdictions, international tax law is necessary to clarify the distribution of taxation rights in cross-border VDA transactions. Secondly, the valuation method for determining the taxable income generated by individuals through VDA transactions is another crucial issue.[4] Accurately determining the taxable value of such transactions is challenging at the moment because there isn’t a standardized valuation technique available. By creating clear rules and a standardized method for valuing VDAs for taxation purposes, international tax law should address this valuation challenge by providing clear guidelines and establishing a consistent approach. Taxation for Cross–border transactions The Indian domestic law, specifically Section 115BBH, states that VDAs are subject to a 30% tax rate on capital gains upon transfer[5]. However, this section does not explicitly address the tax treatment when the individual is a non-resident of India. Consequently, it raises questions regarding the taxation of income accrued while residing outside India or if the source of income is located outside India as per the definition of accrual provided in the income tax act.[6] The lack of clarity in this regard necessitates a comprehensive interpretation of the applicable tax laws and potential guidance from Indian tax authorities to determine the tax liability in such situations. The international nature of cryptocurrency transactions creates specific taxes issues. With the help of cryptocurrencies, people may conduct transactions without using real money or conventional financial intermediaries in a borderless digital world. However, because cryptocurrencies are digital, it can be difficult to determine how to manage them tax-wise, especially for those who are subject to DTAA. At this time, neither current DTAA treaties nor international tax legislation give any precise instructions on how to tax Virtual Digital Asset transactions. As they struggle to determine the tax liabilities related to these transactions, tax authorities, and taxpayers are both left in the dark by this lack of transparency. The absence of guidelines from international authorities, including the OECD, regarding the taxation of cryptocurrencies has resulted in countries implementing their own tax laws, often imposing tax rates  as high as  30%. This discrepancy in tax treatment compels individuals to explore alternative methods, including trading in tax havens, in an attempt to mitigate the tax burden. Unfortunately, this situation has also given rise to scams on a large scale, as exemplified by the case of FTX.[7] Addressing this issue requires international cooperation, the development of clear guidelines, and effective measures to prevent tax evasion and fraudulent activities associated with cryptocurrencies. The efforts to establish a clear international tax framework for cryptocurrencies are crucial. By developing specific provisions within DTAA treaties and international tax laws, countries can ensure consistency and fairness in taxing cryptocurrency income. Absence of Methodology for Valuation The absence of procedures for valuing cryptocurrencies in India’s current laws makes it difficult to calculate their taxable worth. Despite the ease with which cryptocurrencies may be exchanged for fiat money anywhere in the globe, the precise procedure for valuing them for tax reasons is not specified. The valuation of VDAs presents a challenge in the Indian context. While VDAs are considered property under Section 56(2) of the Income Tax Act,[8] the specific valuation method for VDAs is not outlined. The Fair Value method as defined in Rule 11UA of Income Tax Rules,[9] does not explicitly cover the valuation of cryptocurrencies and other VDAs, and no proposed modifications have been made to address this gap.[10] In situations where an individual is subject to taxation in India but receives income in a wallet based in another country, determining the appropriate valuation becomes crucial. There are two options: using the amount in the other country or valuing the income in India at the time of taxation. However, clear guidelines and direction from Indian tax authorities are needed to address this valuation dilemma in cross-border scenarios involving cryptocurrency income. Indian tax authorities may assist in creating transparent and uniform standards for valuing digital currency revenue, maintaining fairness in taxation, and encouraging compliance by giving explicit clarity and direction. Potential Tax Regulations In the regime of global taxation, two distinct jurisdictions prevail: source nation-based jurisdiction and resident nation-based jurisdiction. The majority of jurisdictions, like the United States of America and China, use both concepts in their

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION In the Budget 2022, the Finance Minister introduced a provision to impose income tax at a rate of 30% on profits obtained from the transfer of virtual digital assets (VDAs), although a clear provision still lacks, an attempt to shed clarity on VDAs and their exchange has been made. To that, this piece provides an in-depth analysis of the tax implications surrounding direct and indirect taxation, specifically focusing on the complexities involved in determining the taxable nature of winnings, including digital assets such as bitcoins and tokens, that are received as rewards from online games. Further, the article explores legal literature surrounding the skill-chance dichotomy inherent in online gaming and contributes to the existing discourse around technology driven transactions as rewards. VDAs UNDER INCOME TAX ACT Previously, income earned from cryptocurrencies was taxable based on the nature of the activity. Individuals involved in cryptocurrency investment were taxed under Income from Capital Gains or Income from Other Sources, as per IRS provisions. On the other hand, individuals engaged in cryptocurrency trading were taxed under Income from Business/Profession.However, this classification changed with the introduction of the Finance Bill, 2022.The author believes, considering the unique characteristics of online gaming in India and the necessity for specific regulations regarding taxation, the government has taken steps to address this, however a clear framework still lacks. In terms of income tax, if an individual sells bitcoins received as gaming rewards, the resulting gains would be taxable. The tax treatment of these gains can vary depending on the intent of the individual, whether they classify the gains as business income or capital gains. Previously, there was no dedicated provision for the taxation of online gaming. Instead, Section 194B of the Income Tax Act (ITA) was applied, which dealt with TDS deduction by person who is “responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees.”Additionally, Section 194BB covered TDS deduction for horse racing and wagering. Furthermore, Section 115BB of the Act imposed a 30% tax rate on winnings. Though these provisions existed, it failed to provide an exact framework involving technology driven transactions or a settled position of earnings from games, be it that of skill or of chance. The Finance Bill 2023 introduces two new sections under ITA to regulate winnings from online gaming: Section 115BBJ: This section states that net winnings from online games will be subject to a 30% tax rate, effective from April 1, 2023. Section 194BA: This section mandates the deduction of tax at source at a rate of 30% on winnings from online games, effective from July 1, 2023. Together, these provisions signify the government’s intent to establish a comprehensive framework for taxing and regulating winnings from online gaming. The introduction of specific tax rates and the requirement of tax deduction at source aim to facilitate better monitoring, compliance, and revenue generation in the evolving landscape of online gaming, primarily under direct taxation provisions. VDAs UNDER GOODS AND SERVICES TAX (GST) GST Act lays no specific definition for cryptocurrencies or digital assets, new provisions provide that VDAs cannot be classified as money or securities and are considered as goods for GST purposes. Additionally, the Central Board of Indirect Taxes and Customs (CBIC) has opined that cryptocurrencies are not treated as currency but rather as goods or services, which is important to note as currency is not taxable under the same, while goods and services are subject to taxation under different slabs. Crypto-related activities, including mining, exchange services, wallet services, payment processing, barter systems, and other transactions, require classification as either goods or services to determine the appropriate treatment. However, for determination of tax rates, there is no specific Harmonized System of Nomenclature (HSN) code for digital assets. However, HSN code 960899, which pertains to other miscellaneous articles, is often used with an applicable GST rate of 18%, the highest in that category. To understand how this is implemented, it is important to delve into the skill versus chance discourse. In a significant development last year, the Online Gaming Industry faced a major upheaval when the Department issued a Show Cause Notice to Gameskraft, demanding an extraordinary sum of Rs. 21,000 crores taxing as Goods at a rate of 28%,  however, the Karnataka High Court delivered a landmark judgment addressing the concerns related to the key questions in the GST-related litigation for the Online Gaming Industry are: Skill-based or chance-based: Are the games considered skill-based or games of chance (betting/gambling)? Taxable amount: Should GST be levied on the full amount pooled by players or only on the platform fee charged by Online Gaming Platforms? Addressing the first prong, the Supreme Court established that competitions requiring a significant degree of skill are not considered gambling. If a game is primarily based on skill, even if it involves an element of chance, it is classified as a game of ‘mere skill.’ The Court relied on the Supreme Court’s judgment and determined that Dream11’s fantasy sports predominantly rely on users’ superior knowledge, judgment, and attention, making it a game of skill rather than chance. Similarly, the Bombay High Court analysed Dream11’s Fantasy Games and concluded that they do not involve betting or gambling since the outcome is not dependent on the real-world performance of any particular team on a given day. Rajasthan High Court reached a similar conclusion and dismissed a Public Interest Litigation, stating that the issue of treating the game ‘Dream11’ as involving betting or gambling has already been settled. As for the second limb, the target of taxation, in the context of GST, can vary depending on the specific circumstances and regulations of a particular jurisdiction. However, in general, both players and the platform can be subject to GST. Players may be liable to pay GST on in-game purchases

[By Sanika Deshmukh and Aditya Garg] The authors are students of Gujarat National Law University.   Introduction to DTAA & MFN Clause Double Taxation Avoidance Agreement (DTAA) refers to a tax treaty between sovereign states, undertaken with an intent of fostering trade, while deterring the payment of taxes twice on the same income by taxpayers. It finds application in scenarios wherein an individual is a legal resident of one country, but earns income in another. Such treaties aspire to regulate global trade, and shield the interests of the taxpayers concurrently. Several DTAAs consist of a ‘Most Favoured Nation’ or MFN clause, which permits greater beneficial treatment in matters surrounding taxation to a resident of the contracting state. It refers to providing equally advantageous treatment to the contracting nation as provided under similar treaties to other nations, as such an MFN clause effectually binds one state to another in connection with favourable treatment afforded by it to any other state in future, as Treaty Partners can avail identical benefits that the other contracting country has subsequently acceded to a third country in its respective agreement. The World Trade Organisation and the Organisation for Economic Co-operation and Development (OECD) have noted that MFN treatment acts as a cornerstone of the multilateral trading system, and intends to ensure that trading partners are treated equally, regardless of other considerations. By ensuring that all the countries receive identical treatment, MFN clauses can create a level playing field for all countries, and promote non-discrimination. This can be vital for bringing underdeveloped nations at par with larger or superior nations. MFN clauses can be incorporated as an integral part of the treaty during its inception, or subsequently through an amendment protocol. In India, such protocol accomplishes legal validity as a result of past Income Tax Appellate Tribunal and Delhi High Court decisions. Tug of War in India: Judiciary vs Revenue Authority  India currently has an MFN clause arrangement with over 10 nations, including Belgium, France, Spain, etc. However, the MFN clause has certainly experienced turbulence and discomfort on the Indian shores, as the clause has debatably failed to receive ‘favourable’ treatment from the Indian taxation authorities. The central controversy with regard to the MFN clause in the Indian scenario has been India’s DTAAs with nations such as France, Netherlands, Spain containing MFN clauses permitting utilisation of benefits identical to those India provide to OECD member nations in future DTAAs. India subsequently signed DTAAs with nations such as Lithuania, Columbia and Slovenia, containing withholding tax rates (WHT) of 5% for dividends. It is pertinent to note that these countries were not OECD members at the time of entering into DTAAs with India, however, the genesis of the controversy can be tracked back to time these third nations attained OECD membership, which attracted shouts of activation of the MFN clause from the Dutch and French authorities, in an attempt of availing the benefit of a lower WHT rate of 5%, contrary to the greater 10% rate provided in their respective treaties. Judicial position –  This dispute regarding interpretation of the MFN clause between taxpayers and revenue authorities has attracted involvement of the Indian judiciary, which has notably decided matters encouraging the taxpayer’s position, as evident from a string of decisions. The Delhi High Court has come to the relief of taxpayers’ interests’ multiple times in the last few years, as the Court notably allowed the benefit of a lower 5% rate to a Dutch corporation on account of activation of the MFN clause in the Indo-Dutch DTAA in light of India’s agreement with Slovenia, in the case of Deccan Holdings B.V. v. ITO . Correspondingly, Delhi HC awarded the benefit of 5% rate to two Swiss corporations on activation of the MFN clause in Indo-Swiss DTAA in backdrop of India’s treaties with Columbia and Lithuania, in Galderma Pharma and M/S Nestle, respectively. Delhi HC’s concrete position in the Optum Global-Concentrix Services judgement of 2021 formed the core for these aforementioned decisions, as therein, base for an argument in favour of activation of the MFN clause was formed. The Delhi HC took into consideration the decree passed by the Dutch authorities in 2012[i], when the issue first arose, wherein, the Dutch interpreted the issue in favour of activation of MFN clause, and the taxation rate to effectively change to 5% from the date nations like Slovenia, Lithuania, Columbia achieved OECD membership. Delhi HC went on to derive the benefit of a lower taxation rate and brought into effect activation of the MFN clause in India’s treaty with Netherlands. Thus, the Delhi High Court has passed a series of decisions supporting the taxpayer’s position. Revenue’s ‘Rebuttal’ – However, in contravention to these Delhi HC judgments, The Central Board of Direct Taxation (CBDT)  released a circular on February 3, 2022 in an attempt to clarify India’s stance on the application and interpretation of the MFN clause present in Protocol to India’s DTAAs with certain European nations, and it disclosed that – Firstly, to  import provisions of any third-nation agreement into the relevant DTAA by virtue of the MFN clause, a government notification pursuant to Section 90 of the Indian Income Tax Act, 1961, as reiterated by the Supreme Court in the Azadi Bachao Andolan case. Thus, favourable provisions present in India’s DTAAs with Slovenia, Lithuania, and Colombia will not find automatic implementation in the DTAAs with France, Netherlands, or Switzerland. Secondly, the circular states that the norms of interpretation of international treaties prohibit the selective invocation and use of the MFN clause as suggested by these nations in their unilateral documents (reference to the Dutch decree). The circular claims that the European nations[5] had been informed of India’s view regarding interpretation of the MFN clause. Moreover, the circular further clarified that the MFN clause plainly states that the third State must be an OECD member both at the time the DTAA with India is signed and at the time the MFN clause is applied. Thus, as Slovenia was not an OECD member

[By Parth Bindal and Somasundararajan B] The authors are students of School of Law, UPES.   ABSTRACT In this piece, the authors critically argue that the decision of the government of India to bring “non-resident investors” under the purview of the Angel Tax regime after the removal of the wording “person being a resident” from section 56(2) (vii b) of the Income Tax Act, 1961(hereinafter referred to as said section), post the amendment made under the said section through passing of Finance Act, 2023 by Parliament,(Act 2023) will hurt the private business entities raising capital through foreign investors and will also be a contradiction to governments primary intention of making India an Investor friendly global destination. INTRODUCTION The Indian law makers introduced the Angel Tax Regime in India through the amendment made in the said section, through the passing of the Finance Act, 2012. In the memo of the Finance Bill, 2012, it was observed that the angel tax regime is required to put a “check & control” mechanism on the detrimental practice of misrepresenting unaccounted funds and black money as an investment in a private company’s share capital, which must be avoided.   The regime governing the angel-tax aspect before the passing of the Finance Act, of 2023, had two-layer domain structure which  required private companies to disclose the source of the investment in possession of the investor (section 68 of ITA) & ensure that compliance with Fair Market Value (FMV) where the investment at a premium is obtained from resident shareholders under the said section. Interpretation of the wording, “person being a resident” under the said section, explains that it is only applicable to resident investors and the legislature intended to keep non-resident investors outside the purview of tax compliances before the Act of 2023. The exclusion of non-resident investors is justifiable since such transactions are governed and regulated by the FEMA and rules made thereunder i.e., Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“FDI Norms”). FDI Norms mandate non-residents engaging in Foreign Direct Investment (FDI) transaction with private entities are bound by the pricing standards, which requires companies to issue equity securities to a non-resident at a price not lower than the fair valuation of the respective securities (as determined by an internationally recognized pricing technique) & subsequently verified by a chartered accountant or through a SEBI registered merchant banker. Another issue is the difference of opinion between the taxpayer and the income tax authority over what the FMV should be. This is because as per clause (a) of the explanation to the said section, FMV shall be the greater of the following values: (i) determined using an established method; & (ii) as may be demonstrated to the satisfactory satisfaction of the income tax authorities by the company. The “prescribed method” under Rule 11UA of the Income-tax Rules, 1962 (“hereinafter referred to as the ITR”) enables a taxpayer to value a company’s unquoted shares using either the value of net assets per share or the discounted cash flow (“DCF”) approach derived by a merchant banker. Even though it is a “prescribed method” in ITR but under the said section, and certain Income Tax Appellate Tribunal (ITAT) decisions show that the tax authorities went beyond to object to the DCF method’s application. Furthermore, the majority of startups raise capital based on their funding requirements & a financier’s view of their expansion possibility, the valuations they receive are probably going higher than those obtained using the net value of assets or discounted cash flow methods. The autonomy provided to tax officials under the said section to decline such an assessment are a source of dispute, leading to a slew of litigation. To mitigate the impact of such autonomy; the Finance Act of 2012 included an exemption for investments made by venture capital companies or venture capital funds (“VCFs”). The Finance Act of 2019 extended the aforementioned exemption to considerations paid by Category I & Category II Alternative Investment Funds (“AIFs”). Following that, the government notified certain groups of people that would be considered exempt from the provisions of the said section. For example, the Ministry of Commerce and Industry notified enterprises who would be eligible under the umbrella of “start-up” as exempt. Yet, other start-ups & smaller private companies do not seek capital solely through VCFs & AIFs. As a result, the subject of valuation disagreements among investee companies & tax authorities stays contentious, & the measure has been dubbed an “angel tax.” Another important aspect to note is that these lacunae were attempted to be rectified with subsequent amendments in the said section. But the latest development of bringing non-resident investors into the ambit of the angel tax regime may result as counter-productive in terms of the government’s efforts in making India a global destination for investors and puts a break in its efforts to make India an investor-friendly state with additional compliance for them under FDI Norms. This move will majorly affect fundraising by start-ups that are not registered with DPIIT. According to a report by market research platform Tracxn, financing for Indian startups fell 75% to $2.8 billion in the initial quarterly period of the year 2023, as opposed to the identical time period the previous year (YoY), where it came at $11.9 billion. According to the ‘Tracxn Geo Quarterly Report: India Tech – Q1 2023′ report, the decrease in funding for startups is likely caused by increasing interest rates & inflation, which has an important effect on funding. BLOW TO NON-RESIDENT ANGLE INVESTORS? The current amendment to the discussed said section through Finance Act, 2023 will pose a great challenge to the private companies and start-ups which are not registered with DPIIT. Surprisingly the said section also contains deemed income provision, which conveys that if the buyer of particular kinds of property (including securities) gets such property for an amount less than its FMV calculated in the prescribed way, the difference of the FMV over the price paid is subject to tax in the acquiring company’s hands. The tax authorities believe that

[By Rahul Kumar and Aditya Singh] The authors are Advocate at Sarvada Legal and student at Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction Promissory estoppel is a legal principle that states that a promise made by one party can be enforced by the other party if the promisee relies on the promise to their detriment. This principle is often applied in contract law to enforce promises made by one party to another.  The Hon’ble Supreme Court of India, in the case of Hero Motocorp v Union of India, held that this principle shall not be applicable to the legislative powers of the State. One reason for this is that governments are not bound by the same rules and regulations as private parties. Governments have sovereign immunity, which means that they cannot be sued or held liable in the same way as private parties. While such a stance does make sense from a broader perspective, as policies are often a representation of the ideology of the party in power, and when parties change, so do the policies, it does little to take into consideration the interests of an investor who has made substantial investments into an activity based on such policies. The authors of this piece aim to elucidate why it is necessary not to have a blanket ban on the applicability of Promissory Estoppel on Governments and that there must be certain exceptions to the same, keeping in mind the volatile nature of investor sentiments and the impact of withdrawing incentives. Domestic Scenario The history of Promissory estoppel is very interesting in India. The landmark case on this subject matter is M. Ramanatha Pillai v The State of Kerala, wherein the Supreme Court held, “Therefore, as a general rule, the doctrine of estoppel will not be applied against the State in its governmental, public or sovereign capacity. An exception, however, arises in the application of estoppel to the State where it is necessary to prevent fraud or manifest injustice”. The court, in Sipahi Singh, reiterated this position by stating that “- it is well settled that there cannot be any estoppel against the Government in the exercise of its sovereign legislative and executive functions. In the case of Motilal Padampat Sugar Mills Co. Ltd, P.N. Bhagwati took a contrasting view, holding that, if on the basis of a promise made by a government, an entity changes its legal position to its detriment, the State could not be permitted to resile from the said promise. This was an innovative deviation from the established standpoint of the Supreme Court established in Ramanatha Pillai and Gwalior Rayon Silk Manufacturing. This daring stance was then criticized in the case of Ram Shiv Kumar, and it was held that the findings of the two-judge bench in Motilal Padampat were not in consonance with the stance taken in Ramanatha Pillai and Gwalior Silk, which were decisions of larger benches. Interestingly, when this conflict was brought to the forefront in Godfrey Philips, Justice Bhagwati upheld his own findings in Motilal Padampat and endorsed the judgement. Furthermore, in Union of India v Indo-Afghan agencies, the Supreme Court explicitly mentioned that “Under our jurisprudence, the Government is not exempt from liability to, carry out the representation made by it as to its future conduct, and it cannot on some undefined and undisclosed ground of necessity or expediency fail to carry out the promise, solemnly made by it, nor claim to be the judge of its own obligation to the citizen on an ex parte appraisement of the circumstances. in which the obligation has arisen.” In the instant case of Hero Motocorp, Justice Gavai and Justice Nagarathna have, in clear terms, mentioned that there can be no promissory estoppel against the legislature in the exercise of its legislative functions. The court further noted that Section 174(2)(c) provided that any tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the said notification is rescinded. International Scenario To better understand the impact of changing tax regulations and other incentives offered to investors, one needs to look no further than the crisis that unfolded in Europe, resulting in several arbitration cases, mainly in Spain, the Czech Republic and Italy. The disputes stemmed from the changes brought to the incentive programmes doled out by the governments to attract investors from around the globe. While there were various awards and lines of reasoning adopted by the various tribunals, it could be seen that the general notion was that if there was a specific commitment by a Host State, then that would give rise to a legitimate expectation that these commitments would not then be modified to the detriment of the investor. The case of PV Investors v Spain, is an important one as it highlights the duty of the Host nation to stay true to its words. It concerns a dispute between a group of investors and the Spanish government over the retroactive changes made to the country’s solar energy regulations The case was heard by the International Centre for Settlement of Investment Disputes (ICSID), which is an international arbitration institution that resolves disputes between investors and states. In its decision, the ICSID tribunal found that the Spanish government had indeed breached the principle of fair and equitable treatment, as well as the principle of protection of legitimate expectations. The tribunal also found that the retroactive changes had caused a significant reduction in the value of the investors’ projects and that the investors had suffered a substantial loss as a result. The tribunal ordered the Spanish government to compensate the investors for the damages caused by the retroactive changes. There were many such cases in which the tribunals had a similar stance and looked to protect investor sentiments. The need for application of Promissory Estoppel There are several reasons why promissory estoppel should apply to governments, especially in the context of protecting investor sentiments. First, governments often make promises to attract businesses