Taxation Law

[By Anuradha Garg] The author is a student of Gujarat National Law University, Gandhinagar.   Introduction The new Budget 2023-24 has proposed certain amendments for the gaming sector in India which has witnessed striking growth in the past few years. Currently, the gaming market in India has been estimated to be approximately twice that of China and thrice that of the USA.[i] However, the gaming industry has faced several challenges in India which has hindered its growth. Taxation on this sunrise sector has always been a contentious issue. The growth potential of this sector makes it imperative to analyse the proposed amendments for the gaming industry in budget 2023. Proposed Amendments In Budget 2023-24, the Union Government has proposed the removal of the 30% Tax Deducted at Source (Hereinafter as “TDS”) threshold of 10,000 INR on net winnings.[ii] Earlier, if a player won more than 10,000 INR, the online gaming operator had to withhold 30% as TDS. It follows that under the new regime, irrespective of the money won by the gamer, it will be subjected to TDS under the Income Tax Act, 1961. Hence, the existing provision of Section 194B of the Income Tax Act, 1961 will stand amended.[iii] However, this threshold removal would only apply to online games and games like puzzles and lotteries would be excluded from the application of this provision. The Finance Bill, 2023 has proposed the insertion of two new provisions to the Income Tax Act, 1961. These are Section 194BA which prescribes a tax deduction on net winnings from online games at the end of the financial year or when such winnings are withdrawn and Section 115BBJ which provides for a tax rate of 30% on net winnings from online gaming.[iv] Section 115BBJ also defines ‘computer resource’, ‘internet’ and ‘online game.’[v] The two provisions will be effective from July 1, 2023, and April 1, 2024, respectively. Impact Analysis The removal of the minimum threshold can be seen as a welcome move. Subjecting the income from gaming to TDS under the Income Tax Act, 1961 essentially means that such income will form part of the total income of the player. Therefore, online gaming contests can be created with higher winning amounts and will ultimately promote India’s economic growth. Further, the minimum threshold for TDS had led to the splitting of winnings by players and therefore, this amendment will also aid in curbing this practice. The only downside of such a provision will be that casual players constitute a large proportion of online gaming platforms and they usually earn less than 10,000 INR. This means that the current proposed framework will subject them to TDS if they fulfil the requisite criteria as per the Income Tax Act, 1961. The removal of the minimum threshold will act as a deterrence. Since the new provisions will take effect from July 1, 2023, the gaming companies would be required to follow the old provision i.e., Section 194B for the period preceding it. This can be troublesome and can cause inconvenience in the computation of tax especially when a player wins monies less than 10,000 INR prior to July 1, 2023, but withdraws it a time after the amendment comes into force. Therefore, whether the tax has to be withheld at the time of winning or at the time of withdrawing that winning will remain a matter of concern unless the government clarifies the same. Further, the unresolved complexities will also burden the gaming companies with heavy costs of compliance. Removal of the minimum threshold for online games will also help in settling the conundrum of the ‘game of skill’ and ‘game of chance’ in India. The Finance Bill, 2023 clearly excludes lotteries and puzzles from the purview of this provision which means they will continue to be subject to the 30% TDS requirement. In a way, it also differentiates games of skill from games of chance which the Indian Courts have also attempted to do in various landmark cases like R. Lakshmanan v. State of Tamil Nadu.[vi] A possible outcome of such distinction can be the standardization of tax rates and the formation of tax slabs for the gaming industry in the near future. It will thus help in simplifying the tax regime for the Indian gaming industry. The new amendments to the Income Tax Act will also pave the for the players to set off their losses using their winnings from such gaming contests. Since now, the income from online games can come within the ambit of ‘income from other sources,’ the same can be adjusted as per the Income Tax laws and rules. With the addition of ‘online game’ under Section 194BA, it seems that Section 194B relates to ‘offline game’ under the Income Tax Act, 1961. Thus, in the context of betting and gambling, which can be held both online and offline, the direct tax implications can vary depending upon the definition of ‘online game’ which will likely be clarified by the government in due course of time. Conclusion Good regulatory practices and fair tax policies are crucial to the growth of any economic sector. The same holds true for the Indian gaming sector. While the government has proposed positive amendments on the direct tax front, the future of the Indian gaming industry on the indirect tax front remains ambiguous. In July 2022, the Central Government proposed a 28% GST levy on online games of chance and skill as against the present 18% GST.[vii] This proposal was already vicious for the domestic companies considering the global tax rate for the gaming sector ranges between 15-18%. Further, the non-addressal of the same in the budget 2023 has added to the quandary. To address the loopholes in the proposed framework, certain measures can be taken by the government. As highlighted earlier, the removal of the minimum threshold will deter casual gamers who earn less than 10,000 INR in online games. Therefore, the government can introduce special provisions to exempt such category of gamers from the scope

[By Arghya Sen] The author is a student of Amity University.    I. Introduction The digital economy has grown rapidly over the past few decades, and as a result, the taxation of digital goods and services has become an increasingly important issue in the global economy. In this article, we will explore the challenges and opportunities associated with taxing digital goods and services and the various ways in which countries and organizations are responding to this issue. The digital economy now represents a significant share of global economic activity, and it is expected to continue growing in the years to come. As more goods and services are delivered digitally, it becomes increasingly difficult for governments to tax them effectively. This has led to a growing concern among policymakers and tax authorities around the world about how to ensure that the tax system remains fair and effective in the face of technological change. The purpose of this article is to provide an overview of the taxation of digital goods and services in the global economy. We will examine the challenges that arise when taxing digital goods and services, the responses of different countries and organizations to these challenges, and the proposed solutions to the issue. Ultimately, this article aims to help readers gain a better understanding of the complex and rapidly evolving landscape of digital taxation and its implications for businesses, governments, and consumers. II. Background Digital goods and services are products and services that are delivered electronically or through the internet. This includes things like e-books, music and video streaming services, online advertising, software, and cloud computing.[i] The growth of the digital economy in India has been significant in recent years. In 2020, the total size of the Indian digital economy was estimated to be around $400 billion and it is projected to grow to $1 trillion by 2026.[ii] The digital economy has had a profound impact on traditional industries in India and has created new opportunities for businesses to reach customers all over the country. However, the growth of the digital economy has also posed challenges for Indian tax authorities. Traditional tax systems were designed for goods and services that are delivered in a physical location, making it difficult to apply these systems to digital goods and services. The borderless nature of the digital economy means that it is often unclear which jurisdiction has the right to tax a particular transaction, and the ease with which digital goods and services can be delivered across borders means that tax revenue can be lost if the tax system is not adapted to this new reality. Currently, the tax system for digital goods and services in India is inconsistent and fragmented. The Goods and Services Tax (GST) was introduced in 2017, which replaced the earlier tax regime and included provisions for digital goods and services. However, there are still many unresolved issues related to the taxation of digital goods and services in India. Recently, India has also introduced a digital services tax (DST) which imposes a 2% tax on the revenues of foreign e-commerce companies that provide digital services in India. However, this tax has faced criticism from some quarters for being discriminatory and potentially harmful to India’s own digital industry[iii]. Overall, the taxation of digital goods and services in India remains a complex and evolving issue, with many challenges still to be addressed. The Indian government is currently working on a number of proposals to modernize the tax system and ensure that it is able to capture revenue from the digital economy. III. The Challenges of Taxing Digital Goods and Services While the digital economy has provided many opportunities for businesses and consumers, it has also posted significant challenges for governments and tax authorities. Some of the major challenges that arise when taxing digital goods and services include: Determining the place of consumption: One of the primary challenges in taxing digital goods and services is determining the jurisdiction in which the transaction occurs. Unlike physical goods and services, which are typically delivered to a specific location, digital goods and services can be consumed anywhere in the world. This creates significant challenges for tax authorities, as they must determine which jurisdiction has the right to tax the transaction. Determining the value of digital goods and services: Another challenge in taxing digital goods and services is determining their value. Many digital goods and services are intangible, which makes it difficult to assign a monetary value to them. Additionally, the value of digital goods and services can be difficult to measure, as it is often based on factors such as usage or user engagement. Implementing and enforcing tax laws: Taxing digital goods and services can be difficult to implement and enforce. Many digital businesses are based in one jurisdiction but operate in many others, which can make it difficult for tax authorities to track and regulate their activities. Additionally, digital goods and services can be easily transferred across borders, which makes it difficult to enforce tax laws and ensure compliance. Tax avoidance and evasion: The borderless nature of the digital economy can also make it easier for businesses and consumers to avoid or evade taxes. Some businesses may choose to locate their operations in jurisdictions with lower tax rates, while others may use complex tax structures to reduce their tax liabilities. This can result in lost tax revenue for governments and an uneven playing field for businesses. Technological complexity: The digital economy is constantly evolving, which can make it difficult for tax authorities to keep up with the latest technologies and business models. This can make it difficult to design and implement effective tax policies that keep pace with technological change. Overall, the challenges of taxing digital goods and services are complex and multifaceted, requiring careful consideration and collaboration between governments, businesses, and other stakeholders. IV. The Global Response The challenges of taxing digital goods and services are not unique to India, and many countries and international organizations have been grappling with this

[By Syed Alwaz Asif] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow. Introduction The post-pandemic world has changed rapidly. Digital platforms, which were a privilege for a few, have become necessary to upgrade workers’ skills[i]. It has provided an opportunity for workers to ensure flexibility in the work that they seek to do. It has become a significant source of employment. As a result, governments are constructing digital infrastructure to give their employees newer digital capabilities. Numerous social groups, including women, people with disabilities, and younger generations, who do not frequently participate in the conventional labour market, have access to income-generating opportunities. They also gave marginalized groups in conventional labour markets, such as refugees and migratory labourers, options to explore. Along with the benefits, these platforms have opened up a pandora’s box of challenges for the regulators. Long-standing taxation economies utilized in employment and tax law are under increasing pressure, which is why the law needs to adapt. The labour market is divided into specified categories due to legal control in these sectors, and rights and duties are associated with each category. The tests used to determine which group a person fits under are murky and too simple to evade lawful taxation for digital platforms. The relationship between the various groups under tax and labour law is particularly unclear. These developments have significantly impacted the taxation aspect for this category of workers. This category of independent contractors is, therefore, exempt from laws governing the minimum pay, working hours, terminations, and, to some extent, employment discrimination. Thus, by structuring one’s workforce as a group of micro-entrepreneurs, one can cut indirect expenses for employers while still abiding by labour laws. Similar economic activity can be classified into several legal forms underneath the current tax and employment law systems, creating substantial financial and regulatory incentives to choose one legal form over another. The taxation regulation provides several incentives to treat persons providing services to the engager’s business as self-employed contractors, which can help engagers avoid regulatory obligations and costs. The tax structure gives the person providing the services additional incentives to incorporate. Being recognized as a ‘gig worker‘ or offering services through a firm will allow the employee to improve his current take-home income. Under Indian Tax Laws, any income gained from an individual’s intellectual abilities is considered earnings from a profession under section 2 clause 24 of the Income Tax Act, 1961. Even if the income from digital works is less than Rs. 2,50,000, no direct tax is charged for this bracket. The income from gig work is subject to taxation under section 28 of the Income Tax Act, 1961 under the heading ‘Profits and Gains from Business or Profession’[ii]. Independent contractors are eligible in law to claim various tax deductions such as rental expenses, repair expenditures, and Depreciation for technological assets used for work and travel expenses. A GST registration is required for independent contractors with a revenue of more than 20 lakhs and who provide services outside of their state. The amount of GST an independent contractor, must pay varies according to their services. He is accountable for 18% GST if there is no rate mentioned. In UK taxonomies, tax disadvantage to an employee compared to a self-employed worker is more prominent[iii]. Under specific assumptions, employees and their employers pay about 70% more tax on such a sum than an equivalent owner-manager of a business and 35% more than an identical self-employed person. Significant incentives are created due to organizing activity in ways except through contract terms. Because of these disparities in tax rates, the tendency to work independently or via a personal digital services firm is detrimental to overall tax receipts[iv]. The rise of individuals working for their businesses and the consequent rise in the new form of working have tax-linked implications. Employees’ income across major jurisdictions is taxed more than self-employed. This is because employees are subject to social security insurance funds in India as well as the UK, but there is no such kind of regulation for self-employed. Many analysts justify the tax deduction that self-employed people receive on the pretext that they do not have active social security benefits. Differential tax treatment means individuals in similar places may have grossly different tax burdens. This lacks equity and fairness and creates economic inefficiency in the tax systems. A vital component of any competent regulatory taxation system is neutrality. Since similar activities are treated equally in a neutral system, people have no incentive to switch from highly taxed or regulated activities to those that are not. As shown above, the tax rates that apply to the same productive work vary greatly depending on whether someone provided their work through formal employment or self-employment. Complexities Involved The workers who are employed in Gig work have many sources of income. It creates practical complexities in filing the tax form. This leads to many individuals either skipping tax payments by mistake or failing to take benefit of tax rebates that come with their work mode. It exposes many workers to potential tax enquiry by the respective department. To buttress this, the workers have to take help from lawyers and accountants, which increases the costs that these workers have to pay to accomplish this task. The demanding challenges are not just limited to those who pay taxes but also to Income tax authorities as far as compliance is concerned. Existing Tax infrastructure needed to be designed keeping the burgeoning Gig Economy in mind. The Income Tax authorities across multiple jurisdictions face communications issues. They had to contact just one employer or platform for tax regulation. They must contact multiple independent contractors to inform them about their tax obligations. They may also have to inform them whether they are underreporting or not reporting their tax obligations. The state of applying different tax brackets to employees and self-employed provides explicit opportunities for tax evasion and avoidance. This puts a strain on Tax-collecting authority, leading to inefficient tax-collection systems. For Tax avoidance, individuals leverage the more significant

[By Ujjawal Badani & Tejas Geetey] The authors are students of  the National Law University Odisha. INTRODUCTION Business Corporations often operate through multiple locations in the form of Head Office (HO) and Branch Offices (BO). Division of Offices into HO and BOs has not been defined either under the GST law or the allied laws, however, generally, it means the principal office of a business corporation, established for policymaking and governance. HO as the primary body has multiple functions including accounting, finance, and management services which are performed for the governance of other branch offices. For instance, strategy-making and communications are generally conducted at HO and then applied to its BOs which function across the states. Under the GST, each branch office of the same organisation is regarded as a “distinct person” and is required to obtain GST registration and also to comply with procedural requirements for each respective state. Further,  if there is any supply of goods and services between two distinct persons, then such has to be invoiced as per GST. This concept is referred as cross-charging. The question raised by coming of the cross-charging under GST is that whether services by HO to its BOs/other units can be regarded as ‘supply’ under the GST? Further, another important subset arising from this is the cost of allocation of services provided by the employees of HO to it branch offices. In this piece, the authors have tried to analyse the above issues in respect of conflicting views surrounding cross-charging. SERVICES WITHIN ORGANIZATION To determine whether the activity performed by HO is supply, it needs to qualify as supply u/s 7 of the CGST Act, which is an inclusive definition (including activities such as transfer and barter) for a consideration when made for furtherance of business. The definition of supply alludes to Schedule I of the CGST Act, wherein activities are considered as supply also in cases if they are with no consideration. The respective office/branch of the same organization is regarded as a distinct person for GST registration. It is very clear that stock transfer of goods between distinct person is chargeable to tax. However, the issue which lies is “whether activities carried out by HO for other units would be construed as supply and leviable to GST or not”. The AAAR of Karnataka in ruling of M/s Columbia Asia Hospitals Private Ltd shed some light on similar issue   which was filed by the applicant to know “whether the activities performed by the employees at the corporate office in the course of employment such as accounting, other administrative and IT system maintenance for the units located in the other states shall be treated as supply or not?” The ruling was passed on the finding that employees employed at HO are providing services at HO. Thus, there is employer-employee relationship only at HO and not BO. Based on Schedule I of the CGST Act, it was determined that such transaction, even if there is no consideration involved, is chargeable to GST. However, the Karnataka High Court has granted stay on the AAAR’s order. There is a lot of ambiguity revolving around this issue. The decision of Karnataka High Court is much awaited, and only suitable clarity could beat the heat. Recently, this issue was also dealt in case of M/s Tupperware India Private Limited (‘applicant’). In case of applicant, the HO provides various business support services to its other units. The authorities in this matter as well passed adverse ruling and concluded that GST is chargeable on services supplied by HO to its other units/offices by way of performing activities as it benefits another distinct person. SERVICES PROVIDED BY EMPLOYEES OF HO TO BO Now coming to the second part of this piece. Schedule III of the CGST Act clearly mentions that “services by an employee to the employer in course of employment” shall not be considered as supply and therefore tax cannot be levied on the same[i]. Though the act clearly excludes the services of employees from taxation, the same interpretation is not considered by the Courts. In the case of Columbia Asia, the Authority held that employees providing their services in other branch offices were not considered as a part of employer-employee relations. The Appellate Authority had ruled that the employer-employee relation mentioned in Schedule III has to be restricted under the GST Act. As distinct persons can be taxed, therefore, the relationship mentioned in the Schedule has to be restricted to one office. Therefore, the service of employees shall be considered as supply. But, the CGST Act provides that tax invoices will be charged on “distinct persons”, i.e., in this case, the HOs and BOs which and, therefore, it cannot cover an employer within its ambit. Further, there are problems present in the valuation of such supplies as it is done without any consideration. It will be difficult to determine at what cost the services given by employees are allocated to the other offices.[ii] ~Current Stance Though the decision in the advance ruling is only applicable to the particular parties to the dispute, the same did not happen in relation to the disputed matter of employees’ services. The advance ruling in the case of Columbia Asia gave chance to the other states to start following the lead. In the recent advance ruling of Cummins India, the issue dealt was whether the input tax credit (ITC) received by the HOs for providing common input supplies to other BOs will be considered as supply under the CGST Act? The Authority held that transactions performed by the HOs for the other BOs will be considered as supply. Further, the salary of employees of the HO should also be allocated and charged. The above ruling stretched the conflict further by considering input-service distribution (allocation of ITC on input services) and cross-charging under one ambit. Moreover, it is contended that the transaction that happened in the above case cannot be taxed as it is a “pass-through mechanism” and therefore not a

[By Priyanshi Jain] The author is a student at the Institute of Law, Nirma University. Introduction A show-cause notice consists of a prima facie opinion by the tax department with respect to the offence made out against a taxable person. The aim of pre-show cause notice is to reduce the burden of unnecessary litigation before issuing the final show-cause notice. The need for the same was initially highlighted in the First Report of the Tax Administration Reforms Commission, wherein it was held that a vertical dispute mechanism for pre-show cause consultation should be set up; this shall ensure that preventable and unwanted disputes do not take much time of the tax department. Following these recommendations, through a circular published on December 21, 2015[i], the Central Board of Excise & Customs (‘CBIC’) made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more. Recently, in the case of Gulati Enterprise vs Central Board of Indirect Taxes and Customs & Ors[ii], the Delhi High Court emphasized the mandatory nature of the pre-show cause consultation notice. It negated the substitution of this statutory notice with a voluntary statement. Section 74(1) of the Central Goods and Service Tax Act, 2017, read with rule 142(1)(a) of the Central Goods and Service Tax Rule, aims to establish the above-said principle by offering an opportunity to the assessee on a pre-show cause notice stage. The blog puts weight on the High Court decision by reiterating the necessity of a ‘pre-show cause consultation notice’ to eliminate the unnecessary burden of litigation by promoting voluntary compliance. The blog also aims to highlight the existing face-off between the department and the taxpayer in accordance with pre-show-cause consultation. Unnecessary Burden of Litigation The First Report of the Tax Administration Reform Commission (‘TARC’)[iii] advised the department to avoid disputes in cases where a collaborative effort can render an effective solution. The present Indian Tax Regime is filled with procedural complexities, ultimately leading to unreasonable delays and hefty expenses. Prolonged litigation in matters related to taxation and the overall hassle of reaching an amicable solution has created a perception that the current tax system is unfavorable to taxpayers. This issue is placed on the centre stage when a substantial amount of revenue is blocked in disputes, which could benefit the Indian economy if the dispute is settled amicably. Hence, in such a scenario, it becomes imperative to introduce a system by which the head-to-head approach can be rationalized in three precise steps first, effective case management; second, preventing procedural formalities and third, providing multiple opportunities for settlement and alternative dispute resolution. In order to implement the above-said system into practice, through a circular published on December 21, 2015, the CBIC made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more. Such an administrative mechanism may be instituted to resolve tax disputes prior to the notice stage by creating a forum for open dialogue between the taxpayer and the department. The forum promotes a bilateral discussion to articulate and scrutinize their positions on the present matter. The possibility of an amicable resolution increases when both parties resolve the dispute through a consensus. The Delhi High Court in Amadeus India Pvt. Ltd. vs Pr. Commissioner, C.Ex, ST & CT (2019)[iv], while reiterating the mandatory nature of pre-show cause consultation notice, highlighted that if the process of such notice is followed in a proper spirit, it shall reduce a significant number of disputes. However, it should be noted that the process is not indefectible since it is subject to failure in case a mutual agreement is not reached. The Tax Administration Reform Commission (‘TARC’) further recommended that tax officers should not be permitted to fall back on coercive methods for facilitating recovery during the pre-consultation process. The report advises three essential guidelines for the department to follow for promoting the above-said forum for discussion and open communication: first, only the officer competent to issue a notice shall be allowed to take part in such consultation; second, the tax officer shall adopt a receptive and open vantage point; third, the tax officer shall provide full consideration to the views of the taxpayer before reaching to a conclusion. The above-mentioned guidelines aim to narrow down the contentions made by any party if a legal action arises thereof. The contentions on which an agreement has been reached shall not be contested further by either party. Therefore, the pre-show-cause consultation mechanism aims to achieve a more effective and efficient dispute resolution system. This, in turn, reduces the unwanted burden of litigation in the Indian indirect tax regime. Tax Payer vs The Department  It is imperative to note that the process of pre-show-cause consultation is not a statutory procedure but rather a procedure meted out by the Central Board with the objective of increasing compliance and decreasing the need to issue show-cause notices. The overall conclusion is that any procedure developed by the CBIC to balance the interests of the assessee and the revenue should be given due consideration. Unfortunately, the department, in several instances, has failed its obligation to grant an adequate opportunity for consultation to the taxpayer, completely disregarding the instructions provided by the CBIC through their circulars. It was observed in the case of M/s Dharamshil Agencies vs Union of India (Gujarat High Court) Special Civil Application No. 8255 of 2019[v] that it was the department’s responsibility to issue a pre-show cause consultation notice immediately after the final audit report was published. The court held that an ‘illusionary’ pre-show cause notice, in its essence, is arbitrary and against the very object and purpose of the Master Circular. The Central Board’s circulars bind the department, and it cannot simply disregard the numerous circulars issued by the CBIC regarding the said consultation or issue show cause notices on its own. In a situation where we accept that the department has issued the pre-show-cause notice in accordance with the circular published by the CBIC, the taxpayer cannot be completely

[By Anshika Agarwal] The author is a student at the Vivekananda Institute of Professional Studies, GGSIPU, New Delhi. Introduction In keeping up with the global trends, India has always been consolidating its financial position in international markets. With a stable tax framework and an attractive Foreign Direct Investment regime, India has enhanced its ease of doing business, thereby, attracting cross-border transactions and investors. Today, India stands as a potential hub of global investments and has attracted a high inflow of Foreign Direct Investments in recent years. With more and more investors venturing into India, the smooth flow of transactional activities has become a matter of concern. This trend has led to the problem of double taxation. Double taxation refers to a situation where the income of the company is subjected to dual taxation based on its place of residence and source of income. To resolve this impediment, Indian taxation laws provide for the provision of credits to its residents. The said credit can be granted to an Indian resident assessee irrespective of whether there exists a DTAA between his resident country and the specified country. This credit can be granted in respect of countries where there exists a Double Tax Avoidance Agreement (hereinafter, “the DTAA”) between India and the specified country or territory, and also in cases where no such agreement is negotiated by the Indian government. The credit also known as Foreign Tax Credit (hereinafter, “the FTC”) becomes available when a foreign tax is paid in respect of an income already taxable in India. The said credit is used for setting off the tax payable under the Income Tax Act, 1961 (hereinafter, “the Act”). The process remains smooth and follows an ordinary credit method. However, complexities crop up when the tax payable under the Act is less than the foreign tax paid. In such a scenario, the allowability of the unclaimed and unutilized foreign tax as a business expenditure becomes a vexed question. The article aims to decode the uncertainties in the treatment of such a tax in the light of some recent rulings pronounced by different Courts/ Tribunals. Applicable legal provisions To analyze the above question, it becomes pertinent to look into the applicable legal provisions. As propounded by Rule 128, Income Tax Rules, 1962 (hereinafter, “the Rules”), a credit termed as FTC will be allowed to a resident assessee in respect of any amount paid by him as foreign tax in earning the income which is also taxable under the Act. For this purpose, the foreign tax would mean a tax covered under the DTAA as entered into by India with any other country, and in cases where no such agreement exists, the tax payable under the law in force of that country. This allowance shall be made in the form of a deduction or relief in the year in which such tax is paid. The relief to be granted would be the lower of the two amounts: the tax payable under the Act and the foreign tax paid. Where the latter exceeds the former, the former amount becomes eligible for credit under Section 90/ 91 of the Act while the balance amount becomes ineligible for the said relief. The treatment of these unclaimed and unutilized relief forms becomes the underlying crux of disputes. With this, Section 37 comes into the picture as well. Section 37 provides that, when an expenditure is incurred wholly and exclusively for the purposes of business or profession then such expenditure can be allowed as a deduction under the head “Profits and Gains of Business or Profession” (hereinafter “PGBP”). Further, such expenditure should neither be of personal nature nor should it be of capital character. An expenditure that qualifies the said conditions would be allowed under this Section. On the other hand, Section 40 a(ii) of the Act disallows the deduction of the amount paid as tax on the income earned under PGBP. Further, the Explanation to the said Section inserted vide Finance Act 2006, includes the amount of foreign tax eligible for relief under Section 90/ 91 as the case may be, under the expression “tax” used in the Section. Issue The issue that now captivates our attention is the uncertainty in the manner of treatment of the unclaimed foreign tax, as to whether such a tax that remains ineligible under Section 90/ 91 can be allowed as business expenditure under Section 37(1) of the Act? Whether the scope of the term “tax” used in Section 40 a(ii) extends to disallow this unclaimed amount of “foreign tax”? Judicial Approach Employed  The impugned issue has time and again, been addressed by various courts and Tribunals. Divergent approaches have been employed to settle it. The recent trends as observed in these rulings are as follows: Reliance Infrastructure Ltd. V CIT-Mumbai The Bombay High Court, in the present case, while deciding upon the above issue, ruled in the favor of the taxpayers. The judgment clarified the scope of Section 40 (a)(ii), explicating the extent of the word “tax” used here. It was observed that the preceding words “in this Act” used in Section 2(43) narrow down the ambit of “tax” to tax payable under the Act, thereby precluding the foreign tax paid. This, in turn, streamlines the scope of Section 40(a)(ii), thereby, limiting it to the tax payable under the Income Tax Act, 1961. In regards to the foreign tax paid, Explanation 1 to the said Section specifically includes the amount eligible for double tax relief under the purview of Section 40(a)(ii). The legislative intent underlying the Explanation was to nullify the dual claims of benefit of credit and of deduction as expenditure, arising on the amount eligible under Section 90/ 91. Hence, in the light of the said Explanation, the Court held that the part of foreign tax that remains unclaimed would not be hit by the provisions of Section 40 (a)(ii). Thus, such an amount, being expenditure incurred to arrive at the global income which is already taxable in India, would become allowable

[By Aditya Maheshwari and Vedman Lokesh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction  In India, the quantum of indirect taxes to be imposed on sectors like lottery, casinos, betting and online gaming have always been a matter of contention, and the same issue has become a tough nut to crack in the Goods and Services Tax (“GST”) era. The major issues are (I) whether online gaming is, to all intents and purposes, a game of ‘skill’ or simply gambling; and (II)  what will be the eventual valuation of these services, consequently impacting the total amount of GST that is to be paid. In this article, we will discuss the complexities mentioned in the issues above and the appropriate course of action for the Union to take keeping in mind current international standards on this issue. The distinction between ‘Game of Skill’ and ‘Game of Chance’ – Indian and Global Perspective Before getting into the nitty-gritty of the distinction above, we must first understand the background of this issue. ‘Game of Skill’ means a game that would require the players to apply their knowledge, know-how, and training in the game. A ‘Game of Chance’ on the other hand would rely more on luck and happenstance and players would virtually be gambling for their success. Coming to online gaming, the most popular model of charging a fee in online gaming is the rake fee model (in this model, the gaming platform charges a fee for running the game in general), the other model being the freemium model (herein the game is free of cost but the elements of the game itself like improving character’s traits, increasing total health, and other value additions are charged.) The conundrum is surrounded by the GST rate to be applied where gambling is subject to a 28% rate while online games when considered a game of skill will be subjected to an 18% rate. Indian perspective The demarcation between a game of ‘skill’ and a game of ‘chance’ was first made in the landmark case of K.R. Lakshmanan v. State of Tamil Nadu where the Hon’ble SC remarked that competitions where a substantial degree of skill is involved, are not gambling even if there is an element of the chance present. In the prominent case of Gurdeep Singh Sachar v. Union of India, the Bombay HC observed that Dream11, a fantasy gaming platform “assigned pre-programmed virtual points to teams/players based on the performance of real-life sports personalities in real sporting events”. However, since the online gamer’s chances are not always contingent on the chances of the teams at the real sports event, these fantasy games could not be called gambling and are games of “skill” that should be subjected to a GST rate of 18%. The same point was reiterated in the case of Varun Gumber v. Union Territory of Chandigarh where it was held that fantasy sports rely on the use of superior knowledge of the games and their players in order to succeed at it. This requires prudent use of judgment and intuition making it a game of skill, not a chance. Global perspective At an international level, with the assistance of various judicial pronouncements, the courts have observed that with some caveats, fantasy sports games are more games of skill than chance alone. In the landmark case of Humphrey v. Viacom, the court held that online fantasy games should be considered a game of skill rather than a game of chance based on the reasoning that the chance of winning in such games is based on the participant’s skill in selecting the team. Moreover, in the case of The people of the State of New York v. DraftsKings, Inc., the Court reiterated the Humphrey judgment by laying down the principle that: “it is overwhelmingly unlikely that the performance of any exceptionally performing client could be due to chance.” Thus, at a global level, factors such as the performance of skilled players in comparison to unskilled players within a set period of games and the effect of sports players on the result are key in order to decide if the game is of skill or chance. Current Legal Regime and its challenges As of now, based on the current industry sources, the Group of Ministers (GoM) looks set to approve a rate of 28% GST on the total gross amount paid by the player. A formal report by the Finance Minister, N. Sitharaman is expected soon based on the panel report of the govt. in May 2021.  The contention made by the industry leaders is that the GST should be charged only on the 10%-15% of service fee that the gaming platform charges and not the entire 100% amount which includes the prize pool created for the distribution of prize money. The % change in GST liability between the two is quite significant and the union has its task cut out for them in terms of ensuring appropriate valuation of services is done. HC Judgements like the Gurdeep Singh case (supra) have made it clear that the prize pool is an actionable claim and since these activities do not amount to gambling, “the activity or transaction pertaining to such actionable claim can neither be considered as supply of goods nor supply of services as per Entry 6 of Schedule III of CGST Act and should be exempted from GST.” At the same time, it could be argued that GST could be charged on the service fee as well as the prize pool by emphasizing Rule 31A of the CGST Rules. If the 28% tax rate is applied, it would be an aggressive move considering the global tax rate on online gaming is between 15-18 percent and the online gaming operators will have to cough up almost 10 times the quantum of tax they are currently paying the government. A move like this will have an enormous negative impact on the industry as well have a direct impact on the consumers who will