Tax
Tax Measures on Online Gaming in India 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.

Table of Contents
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.
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.
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,
“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 investorโs 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.
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.