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India’s New Tax Measures on Online Gaming and Esports: A Potential Catalyst for Investment Claims?

India’s evolving digital landscape has seen a surge in online gaming and e-sports, prompting the government to revisit its taxation policies in this sector. The recent introduction of a 28% Goods and Services Tax (GST) on certain online games has stirred discussions among industry stakeholders and legal experts. While the measure aims to streamline revenue collection from the burgeoning gaming industry, it also raises concerns about potential investment claims from foreign entities.

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The Goods and Services Tax (“GST”) Council, in its 50th Meeting held on 11 July 2023, recommended that GST be levied at 28% on the entire value of bets placed for online gaming. This is a significant shift from the current position under the GST Law, where games of chance are taxed at 28%, while games of skill played online are subject to GST at the rate of 18% only on the platform fees/c

Understanding the Current GST Law

Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) defines the scope of the term “supply”, which excludes certain activities from the ambit of “supply”. Entry No. 6 of Schedule III specifically provides that “actionable claims, other than lottery, betting, and gambling” are to be treated as neither a supply of goods nor a supply of services. This means only lottery, betting, and gambling are currently subject to GST at the rate of 28%.

For games of skill, tax is only payable at 18% on the platform fee. For instance, if an online gaming platform collects INR 1000 as prize money and an additional INR 100 as a platform fee, the tax is only payable on the latter, amounting to INR 18.

The Hon’ble High Court of Karnataka, in the case of Gameskraft Technologies Pvt. Ltd. vs. Directorate General of Goods Services Tax Intelligence, affirmed that rummy is a “game of skill” and cannot be equated with lotteries, betting, or gambling. The court observed that games of skill, whether played online or offline, are distinct from gambling and are not covered under the ambit of the GST law.

Position as per the Recommendations of the GST Council

The GST Council’s recommendations propose a flat rate of 28% GST on all online games, including games of skill. This means both “prize money” and “platform fees” will be subject to this rate. For instance, using the previous example, the total tax would be INR 308, a significant increase from the earlier INR 18.

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The recommendations do not seem to apply to offline “games of skill”, which will likely remain outside the GST ambit. However, the final taxability will be clear only once the amendments to the law are made.

Regulatory Concerns

The GST Council’s recommendations appear to be a step backward for the Indian government, which had been promoting the growth of the online gaming industry. The introduction of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023, and the Ministry of Electronics and Information Technology’s (“MeitY”) plans to introduce a central framework to regulate online gaming are examples of such initiatives.

Union Minister for Finance of Corporate Affairs, Smt. Niramala Sitharaman, emphasized that the GST Council is solely concerned with taxation and not the distinction between games of skill and games of chance. This statement, along with references to casinos when discussing online gaming companies, indicates a potential disconnect between the GST Council and other regulatory bodies like MeitY and the Judiciary.

Challenges and Criticisms Surrounding the Recommendation

The GST Council’s recommendations have been met with criticism, especially from the online gaming industry. Taxing games of skill at 28% on the full amount collected, including prize money, can disrupt this rapidly growing sector. Such a high tax incidence might deter users from engaging in online gaming due to reduced returns. The sector, which has seen significant foreign direct investment and has contributed immensely to innovation, might face potential income and business losses. Moreover, this tax rate is higher than in most other countries, which might lead businesses to shift to more favorable jurisdictions.

Taxation-Related Investment Disputes

Frederick the Great once said,

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“No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.”

This sentiment underscores the delicate balance states must strike when implementing tax measures, especially in the online gaming sector.

Tax-related disputes under international investment agreements (IIAs) can be complex. Not every tax-related dispute can be submitted to Investor-State Dispute Settlement (ISDS). A distinction exists between tax disputes, which concern the quantum of a foreign investor’s tax liability, and tax-related investment disputes, which challenge the legitimacy of a tax measure. Only the latter can be submitted to ISDS.

Historically, many older investment treaties did not exclude tax-related measures. However, newer treaties often contain ‘carve-out’ clauses that limit the ability of investors to bring tax-related claims under an investment treaty. Depending on their scope and application, these carve-outs can be general, targeted, or multi-layered.

Potential for Investment Claims in India

Given the intricate relationship between taxation and international investment law, Bilateral Investment Treaties (BITs) often protect foreign investors from abrupt regulatory changes that might adversely affect their investments. With India’s new tax measures, there’s a latent concern that foreign entities, especially those with significant investments in the country’s online gaming sector, might perceive these changes as detrimental to their business interests.

Historically, abrupt or retroactive taxation measures have led to BIT claims, as seen in high-profile cases like Vodafone and Cairn Energy against India. While the current GST amendments are prospective and not retroactive, the differentiation in tax rates based on the nature of the game could be seen as discriminatory by foreign investors. If foreign entities believe that the new tax measures violate the Fair and Equitable Treatment (FET) provision or any other protective clauses in BITs, it could pave the way for investment claims against India.

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Conclusion

India’s endeavor to regulate and tax the online gaming industry is a testament to the sector’s growth and significance in the country’s digital economy. While the intent is to ensure a fair taxation system, the government must tread cautiously. Striking a balance between generating revenue and ensuring a conducive environment for foreign investments is crucial. As the new tax measures unfold, it will be imperative for India to engage with stakeholders and address any concerns proactively, mitigating the risk of potential investment disputes.

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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Indian Government Forms Ministerial Group to Tackle Esports Regulations

This article delves into India’s efforts to establish a dedicated group of ministers tasked with overseeing the regulations of the country’s gaming industry, particularly focusing on esports and esports betting.

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Introduction to the New Oversight Committee

The Indian government is taking a proactive step towards regulating the gaming industry by considering the establishment of a dedicated group of ministers (GoM). This initiative comes in response to the gaming sector’s exponential growth and the pressing need for a robust regulatory framework to ensure integrity, fairness, and ethical standards.

Composition of the Oversight Committee

The proposed GoM is expected to include key government figures such as Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, IT Minister Ashwini Vaishnaw, and Information and Broadcasting Minister Anurag Thakur. Their combined expertise will be pivotal in addressing the multifaceted challenges and opportunities within the gaming industry.

Objectives and Responsibilities

The primary aim of the GoM will be to conduct a thorough analysis of the current regulations governing esports and the burgeoning field of esports betting. The Ministry of Electronics and Information Technology (MeitY) will remain the principal body regulating online gaming, with support from senior officials from the Departments of Revenue, Income Tax, and the Department for Promotion of Industry and Internal Trade (DPIIT).

Industry Engagement and Self-Regulation

Despite the move towards governmental oversight, there is ongoing dialogue with key industry stakeholders and various gaming organizations. These entities are advocating for the creation of a self-regulatory organization (SRO). However, the GoM will still oversee critical concerns such as taxation and anti-money laundering measures within the gaming industry.

Taxation and Anti-Money Laundering Proposals

One of the significant proposals under consideration is the imposition of a 28% Goods and Services Tax (GST) on esports online betting. To combat money laundering, the industry has suggested automatic blocking of gaming accounts upon reaching a certain threshold, stringent regulations to prevent Foreign Exchange Management Act violations, and the establishment of a detailed database of players.

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Balancing Growth and Regulation

As the government and industry stakeholders navigate the complexities of esports betting and taxation, the need for a balanced approach is clear. The ongoing discussions aim to find a middle ground that promotes economic growth while ensuring responsible and ethical industry practices.

Additional Insights from The Economic Times

According to The Economic Times, the Centre is likely to set up the GoM to look into the regulatory framework for the gaming industry. The GoM’s formation is in response to various issues, including GST demands and concerns raised by enforcement agencies over potential money laundering, tax evasion, and data inadequacies. The government has also called for the formation of an SRO within three months, adhering to guidelines prescribed by MeitY. Industry bodies have submitted draft proposals for the SRO, emphasizing the inclusion of civil society members to mitigate the negative impacts of online gaming, particularly on schoolchildren.

Conclusion

The formation of the GoM marks a significant step towards establishing a more structured and secure gaming environment in India. The collaborative efforts between the government and industry players are crucial in shaping a regulatory landscape that protects players and fosters sustainable industry growth.

Image by: wirestock

Author

  • Gilberto Ceballos

    Gilberto is a Mexican law student at Universidad Panamericana in Mexico City, one of the top law schools in the country, with an unwavering passion for various legal subjects like international law and arbitration. He is part of the full immersion program, designed to provide students with a deep understanding of international law. This experience aims to delve into the complexities of global legal systems, international relations, and dispute resolution mechanisms. In addition to this, Gilberto participated in the youth parliament organized by the Mexican Senate, representing the voice of the Mexican youth, as well as having various international academic experiences in Canada, United Kingdom and France. He is a passionate gamer and looking forward to contribute to ELN.

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Senators Promote Tax Benefits for Taiwanese Artists and Athletes

Senators Catherine Cortez and Marsha Blackburn are pushing for a bill that offers tax incentives to Taiwanese artists and athletes, from musicians to esports players, to eliminate double taxation.

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Senators Catherine Cortez and Marsha Blackburn, representing cities with important music and entertainment industries, have proposed a bill to support Taiwanese artists and athletes (including esports players) by providing them with favorable tax treatment. 

The Senate Finance Committee agreed to add a section to its legislation to eliminate double taxation for Taiwanese businesses, investors, and workers, especially entertainers and athletes. This change in legislation would exempt Taiwanese musicians, artists, and athletes from paying taxes in the US if they earn USD 30,000 or less, nevertheless, this benefit depends on Taiwan offering the same benefit to U.S. entertainers and athletes.

Senator Catherine Cortez advocates for Nevada’s tourism and entertainment industries, which include Las Vegas. She aims to prevent overtaxing artists and entertainers with double taxation, and her support for the bill seeks to help the entertainment and music industries.

The bill provides Taiwan with tax treaty-like benefits. However, it still requires the resolution of jurisdictional disputes with the Foreign Relations Panel. 

In the Finance Committee’s opinion, this is a beneficial bill that is seen as an alternative to a formal treaty to avoid overhanging the US tax code. In addition to reflecting their commitment to their home-state interests, like the states of Nevada and Tennessee. The bill has the support of both parties and seeks to strengthen ties between the US and Taiwan.

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Current Regulation

As of now, if you are a nonresident athlete or entertainer performing independent personal services in the US, you generally pay US income tax on income generated in the US. This includes compensation for performances, endorsements, the sale of merchandise, and royalty or other income closely related to the event. 

You are also required to file a US federal income tax return to report and pay any US tax. Generally, if you are a non-resident athlete or entertainer performing independent personal services or participating in events in the United States, you are subject to the following special tax:1

  1. https://www.irs.gov/individuals/international-taxpayers/taxation-of-foreign-athletes-and-entertainers ↩︎

Image:Shutterstock

Author

  • Gilberto Ceballos

    Gilberto is a Mexican law student at Universidad Panamericana in Mexico City, one of the top law schools in the country, with an unwavering passion for various legal subjects like international law and arbitration. He is part of the full immersion program, designed to provide students with a deep understanding of international law. This experience aims to delve into the complexities of global legal systems, international relations, and dispute resolution mechanisms. In addition to this, Gilberto participated in the youth parliament organized by the Mexican Senate, representing the voice of the Mexican youth, as well as having various international academic experiences in Canada, United Kingdom and France. He is a passionate gamer and looking forward to contribute to ELN.

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Esports: What’s in the Tax?

The emergence of the metaverse has highlighted how the lines separating the digital and virtual spheres are becoming less distinct. Virtual reality tech pioneers are now realizing the growing demand for intricate virtual environments. A key element of this shift is the flourishing commerce of virtual items, exclusive to online role-playing platforms.

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Tax Implications for Virtual Items

The German Federal Fiscal Court (Bundesfinanzhof, BFH) recently delved into the issue of whether the sale of virtual items should be subject to sales tax. Their conclusion was clear: Transactions within the virtual environment remain exempt from sales tax until such a time when virtual currency is converted into actual money.

The Financial Landscape of the Virtual Economy

Digital platforms typically have their own financial systems and transactional procedures. Some platforms even offer a unique opportunity for players to convert their virtual achievements into actual cash, marking a prosperous venture. To give a clearer picture, the revenue from such virtual transactions in Germany alone amounted to an impressive EUR 3 billion in 2020.

BFH’s Perspective on Digital Taxation

In a landmark case, the BFH was tasked with determining if a gamer’s transaction involving the virtual property was a taxable event under the German Turnover Tax Act (Umsatzsteuergesetz, UStG) (BFH, 18 November 2021, Case No. V R 38/19). While the Fiscal Court (Finanzgericht, FG, Judgment of 13 August 2019, Case No. 8 K 1565/18) of Cologne had earlier sided with this notion, the BFH set a boundary, distinguishing in-game virtual transactions from real-world financial activities.

At the heart of this case was a gamer who rented out virtual plots to fellow players in exchange for the game’s digital currency. Interestingly, the game’s administrator even facilitated a “rental contract” for such transactions. Yet, this virtual rental was defined in the game’s terms as a restricted license, symbolized by a digital token. The gamer later traded this virtual currency for tangible money.

The Debate Over Economic Value in the Virtual World

The FG Cologne viewed the virtual plot rental as a taxable advantage. However, the BFH countered that a transaction should offer a tangible economic benefit for a transaction to be taxable. While renting out virtual plots might enhance the gaming journey, it doesn’t provide a concrete economic advantage. In-game activities in exchange for digital currency are categorized as non-taxable.

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Yet, the narrative shifts when in-game currency is exchanged for tangible money. The BFH drew parallels to scenarios where sports event organizers charge for equipment usage. In this context, trading digital currency becomes a taxable service.

Emerging Concerns and Implications

The BFH’s pronouncement has spurred discussions. While the distinction between digital and tangible services seems straightforward, there are nuances. For instance, if digital rights like cryptocurrencies can lead to taxable outcomes, why should in-game currencies be any different? The sustainability of the BFH’s clear division between these realms remains to be tested.

Gamers should be cognizant that tangible profits stemming from in-game activities could be taxable. Moreover, regular monetary gains from virtual gaming might also bear income tax implications. As highlighted by the BFH’s stance on the taxability of online poker profits (BFH, Judgment, 25 February 2021, Case No. III R 67/18), the broader context plays a crucial role. Sporadic profits from selling virtual assets might not be taxable, but consistent revenue might be.

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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