[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 bear the additional tax burden. Considering the fact that the industry is in its infancy, a higher tax rate would mean smaller profit margins for gaming operators and consequently slowing down of their expansion rate. This will also lead to smaller prize pools and the higher prices may drive consumers away from the platforms. Therefore, a reasonable rate of taxation is the need of the hour and a centralized body should be formed to overlook the online gaming space as well as maintain uniformity of the law across states.

Analysis

Taxation on Fantasy Sports Industry – A Global Perspective

Taxation on online fantasy games is a global issue with different economies using different mechanisms to define gambling and imposing tax either on the Gross Gaming Revenue (“GGR”) or Pool Prize Money. The imposition can be understood in reference to the taxation regime being practiced globally.

1. Nevada’s gaming regulation –

In the United States, with the overruling of the Professional and Amateur Sports Protection Act (“PASPA”), each state in the country is allowed to make its regulations in regard to taxing online fantasy game companies. One of those states, Nevada enacted Nevada Gaming Control Act wherein a tax of 6.75 percent is charged on the GGR of the company.  

2. French online gaming regulation –

Recently, the French Senate has passed the online gaming regulation bill whereby certain amendments in regard to the taxation regime have been made. Earlier, before the amendment, the tax was imposed on the pool money rather than on the revenue. The senate while making amendments has emphasized  the 2015-16 activity report of Autorité de Régulation des Jeux En Ligne, an online gambling regulator in France where it was observed that:

“The tax on stakes is too burdensome, and prevents the balanced development of this market.”

Impact on the Fantasy Sports Industry

There would be devastating consequences for the online gambling business if the proposed tax hike from 18 to 28 percent were to go into effect. It must be noted that putting online fantasy businesses in the 28 percent GST category will not only slow growth but also make investment returns unfeasible. Moreover, with the pool prices going higher, existing players might start quitting the industry which would make a place for foreign players to come into action. The result would be an increase in grey market substitutes and ultimately growth of the black market.

The industry is growing at a stupendous rate with 2 million users in June 2016 to 90 million users in December 2019, the GST is paid by both the Fantasy Sports Industry as well as OFSP Operators is quite colossal in nature and thus, the move to imposing 28 percent tax on value rather than revenue would lead to 900 percent increase in tax.

Imposition of GST – Revenue or Value?

As per the present legal regime, the GST of 18 percent is being imposed on the revenue being generated by the fantasy industry. The Group of Ministers (GoM) suggests an increase in the tax rate from 18 percent to 28 percent along with imposing it on total value rather than revenue would have economic as well as social impact. As far as the economic impact is concerned, the fantasy industry accounted for 10,000 crores in the form of Foreign Direct Investment (“FDI”) in the Financial Year 2020-21. With industry generating such an enormous amount of FDI along with the tax revenue, the move to increase the tax could hamper the growth and could impact the country economically with potential regulatory changes.

Moreover, the Indian legal regime is always influenced by the practices prevailing globally such as the recent International Financial Service Centres Authority (Fund Management) Regulation, 2022 being developed based on global practices. In regard to the present context, the United States as well as France both impose a tax on revenue rather than value. Regarding the tax rate being imposed, Nevada imposes a 6.75 percent tax on fantasy sports businesses.

Conclusion and a Way Forward

The present conundrum regarding an increase in GST on the fantasy sports industry has an impact both on the industry as well as on the economy of the country. To overcome the complexities of the present legal regime, it is necessary to enact a central law for the regulation of the fantasy sports industry as suggested by Niti Aayog. Fantasy sports platforms and their services would be more consistent, and there would be a uniform way of resolving grievances across the country with a united approach. Moreover, it would provide much-needed clarification on the GST issue afflicting the sector by outlining a precise GST levy procedure that establishes the rate and the value on which GST is to be charged. Lastly, the decision of the GoM to increase the GST is yet to be considered by the GST Council and they must consider all these factors including the global practices before making any decisions.