Delta Corp Gaming Company: Analysis of GST Implications through Taxpayer Lens

Delta Corp is an Indian public company that specializes in gaming and hospitality. It operates offshore and onshore casinos, online poker and rummy platforms, and luxury hotels under the Deltin brand. The gaming company faced a big hit when the GST Notice was served to them demanding ₹ 16,822 crores. Over this blog, we would like to highlight various aspects for the litigations in general.  The insertion of Rule 31B in the CGST Rules via Notification No. 45/2023 – Central Tax dated 06th September 2023 has created the room for the service of the notice. To know more on Rule 31B read Click here. 

Prior to insertion of rule 31B, the rule 31A was used to interpret that the value of supply of actionable claim in betting, gambling or horse racing at 100% or the full face value of the bet or the amount paid into the totalisator. The casino industry had raised objections to this interpretation and asked for the tax levy to be on the "globally accepted practice" of gross gaming revenue. This debate was one of the reasons that prompted the constitution of a Group of Ministers to review the taxation of casinos, horse racing and online gaming.

“The new rule 31B may not be sustainable considering that amendments are substantive in nature and are not procedural." When a substantive law is brought about by an amendment, there is no assumption that it "ought to be given retrospective effect".

Online games & casinos an over view: 

Online Gaming & Casinos are often related to gambling. The term "gaming" in this context typically refers to instances in which the activity has been specifically permitted by law. The two words are not mutually exclusive; i.e., a "gaming" company offers (legal) "gambling" activities to the public and may be regulated by one of many gaming control boards, for example, the Nevada Gaming Control Board in the USA. Gambling requires three elements to be present - consideration (an amount wagered), risk (chance), and a prize.

Deciphering the elements of Gamble in line with GST: 

First element of gamble is the consideration or the wagered amount. In consultation with 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.”

The definition specifically clarifies that the supplier has to apply deposit as consideration i.e., it should neither be refundable nor adjusted against the supply made. Hence, any entry deposits or deposit by way of qualifying for a game will not be consideration unless the supplier considers it as consideration. 

When shall be deposit taken as consideration?

It is to be noted that, for gambling deposits are made in the form of tokens or similar kind as token money. The same shall be redeemed by the player at any time of the game to the extent applicable. When the money doesn’t remain with the supplier how shall that form part as consideration. 

While the rule contradicts the definition of consideration by valuing it at the gross amount. Further, if we understand the nature of deposits made to the supplier, it is not retainable and so not an income for the supplier. In line with the definition of consideration drafted specifically for the GST Act, taking gross value for valuation goes beyond the scope of levy. 

As per sec 7 of CGST Act 2017, the supply which is subject to levy of GST only when it’s done “in course or furtherance of business” and “for consideration” ( exception being Schedule I transactions, the same is not relevant in this context though).  A deposit to the extent retained, when paid back to the customer, there is no supply as such for that value. Thus, GST should be on gross gaming value instead of total deposits made. 

Even if the stand of specific over general provision is taken, when the said deposit doesn’t form part of income, a levy on the same will be unconstitutional. Keeping in mind the same was the clause inserted for the definition of consideration. 

Another perspective would be that, in entry No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017, deposits extended are exempted. 

In any perspective taken, levy of GST on the total deposits taken would hurt the business of the supplier and impedes the development of the industry.  

Second element being risk will also have effect on the consideration. Risk is nothing but the chance of winning a game. As long as the player is able to win the game, the deposit remains with the supplier. When the chance is winning is not ascertainable then on what basis shall it be ascertained for retaining the consideration with the supplier??

Similar challenge is faced in vouchers that are general in nature, where the time of supply is not known at the time of the issue. But Section 13(4 (b)) of the CGST Act, 2017 provides clarity that it would be at the time of redemption of voucher in such scenarios. The amount of retention of the deposit as “consideration” is also not known at the time of deposit. Hence, what will be the time of supply for such supplies made by casinos & gaming organisers? Clarity on the same is not yet provided. Only when the time of supply is known, will we be in a position to ascertain the liability. Only at the time of ascertaining liability Rule 31B enters. But when the first leg that is on time of supply is still unclear, applying valuation rule, will be an ambiguous exercise. Alternatively, the supplier should be allowed to issue a credit note for the deposit returned to the customers to mirror gross gaming revenue. 

Last element being the prize element, there is no hunch about the prize money received in the rule. Assuming the same to be taxed as actionable claim, rule 31A of the CGST Rules, 2017 shall be applicable. Rule 31A(3) provides that “the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalisator”. It is clear that, only when the prize money is announced, the same shall be value of supply or amount paid to the totalisator. Attention is to be drawn to the fact that the amount paid to totalizator is not refundable. Hence, applying the same is feasible. 

When GST is meant for ease of doing business, need to watch out for more meaningful developments for this industry in the days ahead.

-

KN Akshaya MA LLB