Valuation rules for online gaming and casinos

 

Trade and commercial activities require a robust regulatory and legal environment, with stability to achieve its true potential and ensure that the business is able to scale quickly. To determine whether a said game is a game of skill or a game of chance has wide consequences for tax positions. It is often the determining factor for legal implications on the business operations. Whether a game is classified under chance or skill depends on the facts and circumstances of each case. 

Online games operate either on the gain fee model where the gaming platform charges a fee for facilitating the play of games or free-premium models wherein the gameplay is free but extra features may require the user to purchase certain items for a monetary price.

Legality of Online Games in India: 

Punjab & Haryana High Court in Varun Gumber v. Union Territory of Chandigarh and Others case pronounced that “from the perspective of Public Gambling Act, 1867. Section 12 of the said Act reads as: “Act not to apply to certain games – Nothing in the foregoing provisions of this Act contained shall be held to apply to any game of mere skill wherever played”. After examining the factual position and detailed submissions of the Dream-11, the Hon’ble Court found that, “playing of fantasy game by any participant user involves [drafting of] virtual team by him which would certainly require a considerable skill, judgment and discretion. The participant has to assess the relative worth of each athlete/sportsperson as against all athlete/sportspersons available for selection.” It was the element of skill that had predominant influence on the fantasy game than any other incident. As such, it was found that the Dream-11 was not covered under the Public Gambling Act and its activities had the protection granted by the Article 19 (1) (g) of the Constitution of India”. 

In view of the above protection under Article 19 of the Constitution of India, Online gaming has been construed legal and shall be a base for levy of tax. The activity of the online gaming platform to enable gameplays against a gain fee gets covered under the domain of ‘supply’ under Goods and Services Tax (GST) law. Therefore, GST would be applicable on the revenue accruing to industry players.

In light of the provisions of Section 7(1)(a) of the CGST Act, 2017, for a transaction to be considered as a supply the following 5 criteria is essential:

i. All forms of supply of goods or services or both

ii. Made or agreed to be made

iii. For a consideration 

iv. By a person

v. In course or furtherance of business

Online gaming is a service provided by the gaming company to the players, where the game is played for a consideration. Online gaming is a business furtherance for the gaming company. 

The lack of clear valuation principles and ambiguities in levying GST on the entire stake value vis-à-vis the rake fee element has caused regulatory uncertainty amongst industry players and has dampened the industry to an extent.

Mindful of the ambiguity prevailing in the industry the CBIC in Notification No. 45/2023 – Central Tax dated 06th September 2023 has inserted valuation rules for online gaming in Rule 31B of the CGST Rules, 2017. 

Rule 31B is read as, “Notwithstanding anything contained in this chapter, the value of supply of online gaming, including supply of actionable claims involved in online money gaming, shall be the total amount paid or payable to or deposited with the supplier by way of money or money’s worth, including virtual digital assets, by or on behalf of the player:

Provided that any amount returned or refunded by the supplier to the player for any reasons whatsoever, including player not using the amount paid or deposited with the supplier for participating in any event, shall not be deductible from the value of supply of online money gaming”.

The Rule provides that the value of supply for online games would be the total amount paid to the organizer. The specificity enters to consideration with a change in the definition applicability of consideration for online games and the use of Virtual Digital Assets as consideration. 

Analysis of Consideration: 

As per section 2(31) of the CGST Act, 2017 “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Interestingly, the provision for deposit shall not be applicable for online games as the rules specifically denies its deductibility. 

Virtual Digital Assets (VDA) covers any information, code, number or token, non-fungible token etc. (that is to be notified by the government), created through a cryptographic process and provide a digital representation of value exchanged, with the promise of an intrinsic value. Such assets can be transferred, stored or traded electronically.

Value of VDA is measured in various methods like token velocity method, NVT (Net value to Transactions) ratio, Daily Active address method etc. In order to keep it simple, the CBDT applies the taxability on the sum of the consideration in the transfer of the VDA. As no other valuation is currently followed in tax aspects in India, the same “Consideration for the transfer of VDA” shall be taken as the value of supply for VDA. 

Hence care should be taken by the organizers of the game as they are under the purview of GST law and all compliance shall be applicable. 

 - K N Akshaya M.A LLB