View | It’s not rate of tax on lottery, casino and games that scares the taxpayer

How ticklish is the issue of levying Goods & Services Tax (GST) on lotteries, casinos, horse races, betting, gambling and online gaming. It is evident from the fact that the Group of Ministers (GoM), which submitted its report suggesting rates of GST, was asked by the GST Council to reconsider certain issues.

As per the recent news, the GoM, after deliberating on issues of valuation and rates of GST, decided to seek legal opinion on certain aspects.

Conrad Sangma, chairman of the GoM, captured the crux of the matter when he said: “We are talking of three different games... all games are not the same. And the GoM has been asked to look into three separate games which function in three very very different ways."

As per Schedule III of the CGST (Central Goods and Services Tax) Act, actionable claims, other than lottery, betting and gambling, shall be treated neither as a supply of goods nor a supply of services.

If one looks closely at the scope of these three terms, it comes out very clearly that they all are chance-based activities where use of skill is not involved. Going by this, it can be argued that skill-based games are not taxable as actionable claims, as they are not covered within the scope of lottery, betting or gambling.

Online gaming websites are mushrooming on which various types of games can be played — ranging from pure chance-based to highly skill-based games — which calls for unambiguous clarification on their taxability as actionable claim or service.

If such games, particularly skilled-based ones, are not covered within the ambit of betting, then the only alternative is to treat them as service.

Once an activity is considered supply of service, it would automatically go out of purview of actionable claim as a supply cannot be of service as well as goods at the same time.

By definition, actionable claim is included in goods under CGST Act, whereas, under the Sale of Goods Act, 1930, actionable claim is excluded from the definition of goods. Thus, there is total contrast with respect to definition of actionable claim under the CGST Act and Sale of Goods Act.

However, the Supreme Court, in its landmark judgement in the case of Skill Lotto Solutions, held that different statutes may define terms differently and there is nothing incongruous in the definition of goods in the CGST Act by including actionable claim in it.

Interestingly, under the Service Tax regime, such activities were taxed as services. Even lottery was treated as business auxiliary service. Not only this, the Notification No. 11/2017 (CGST-Rate) dated 28.6.2017, which prescribes rates of CGST on various services, also mentions under Sr. No. 34 services provided by way of admission to race course, casino, amusement parks; services provided by race club by way of totalisator and gambling.

Therefore, a comprehensive clarification is very much required to explain the scope of betting, gambling, casino and other chance or skill-based games, particularly their classification as actionable claim or as services.

Another important issue is valuation of these supplies. Put simply, the value as defined under the Act is the transaction value for the subject supply of goods or services.

Therefore, the crucial point is what constitutes supply in such transactions. Rules 31A of the CGST Rules specifically provides for valuation of such activities, according to which, the value of lottery shall be 100/128 of the face value of ticket.

It further provides that 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 percent of the face value of the bet or the amount put into the totalisator.

Apparently, it deals with the chance-based activities which would also include casino. Unlike horse race or lottery which have only one final outcome, casino and betting are played over a large number of rounds. One may begin such games with a small amount or even with the free chips or tokens and in the course of several rounds win huge amounts yet close the game as a net loser.

Therefore, it needs to be clearly defined whether the taxable value should be the net amount received by the organizer or total of each and every bet put by players in all the rounds they played. The decisive point is whether each bet constitutes a separate supply or it’s a case of continuous supply which completes when the player finishes all rounds and leaves the game.

In the case of online games which are generally not chance-based, the players put certain amount on stake and the winner takes it as per the rules of the game. The game platform collects its commission and remaining amount is given away to the winners.

Here again, the crucial point is what constitutes supply and what is the consideration — the total of all bet amounts put by the players or the commission pocketed by the organisers for providing the game platform.

The rate of tax is not as complicated an issue as the valuation. There need not be uniform rate across all games or lotteries. But valuation provisions have to be very unambiguous and easy to apply so as to minimise scope for unnecessary litigation. It is not the rate of tax that scares the taxpayer, but the uncertainty about the interpretation by the tax authorities.