GST complexity and ambiguity issues have often ended up in various courts. Now the Punjab and Haryana High Court has asked GST authorities to bring clarity before proceeding with more challengeable enforcement actions.
Law Enforcement Action against Tax Evasion Halted for the Moment
The Directorate General of GST Intelligence (DGGI) was ordered to halt all search and survey actions aimed at GST recovery from economic operators from the online gaming, casino and horse racing sectors. The major breather for industry players comes on the back of a recent ruling of the Punjab and Haryana High Court ordering the GST authorities to wait for clarifications on GST rates and applicability on services provided by the sector.
The Union Ministry of Finance’s DGGI is the apex intelligence institution empowered to battle evasion of Goods and Services Tax as well as Central Excise and Service Tax duties. The law enforcement agency functions under the cap of the Central Board of Indirect Taxes and Customs at the Finance Ministry’s Department of Revenue.
Reportedly, several companies from the casino and online gaming industry, Delta Corp and Strike Casino among them, had received tax recovery demand notices and had suffered search and survey actions. The owner of the real money gaming platform Big Cash Witzeal Technology Private Ltd challenged the investigative proceedings and complained of coercive measures before the Punjab and Haryana High Court.
The High Court at Chandigarh pronounced its ruling on September 29 directingq authorities dealing with GST collection to halt all law enforcement actions until the GST Council issues clarifications on GST applicability and rate relevancy for casinos, racecourses and online gaming portals.
“…no adjudication and no coercive steps would be taken against the petitioner till such time the necessary clarification is issued by the empowered Group of Ministers but they may be permitted to investigate the matter so that if and when the clarification comes they would not have to necessarily reinvent the wheel,” said the HC division bench composed of Justice Ajay Tewari and Justice Alka Sarin upon delivering the verdict.
Panel of Ministers Has Been Looking into the Issue Since May
Moved by the ruling of the Punjab and Haryana High Court, the GST Sekretariat asked the seven-member Group of Ministers (GoM) led by Gujarat Deputy Chief Minister Nitin Patel to speed up its work and provide its recommendations as soon as possible.
The GoM was constituted in the end of May, and then reconstituted in June, and was initially given a six-month timeframe to examine the valuation of the services provided by online gambling and gaming platforms, racecourses and lotteries for the purposes of GST levy.
The body of state ministers was tasked also to look into the existing valuation legislation and court decisions, as well as into how the regulatory provisions concerning GST related valuations are administered.
According to the Panel’s terms of reference (ToR), the GoM should provide recommendations if any changes to the valuation methods or amendments to the active legislative framework are necessary.
“Online gaming companies are in nascent stages in India, leading to multiple unresolved issues around taxation and valuation, posing a big challenge for the entire industry. Now a GoM has been constituted to understand, examine and resolve the uncertainty surrounding the valuation of services by casinos, race courses, and online gaming companies,” Rajat Mohan, senior partner, AMRG and Associates, welcomed the formation of the Panel of Ministers in May..
Goods or Services, Full Bet Amount or Commissions and Service Fees
GST is a relatively new and complex indirect tax and ambiguities and confusions are a common thing. The question of whether gaming platforms, casinos and lotteries provide goods or services, or even actionable claims, has been addressed to authorities and the courts on numerous occasions.
An order by the Maharashtra Authority of Advance Ruling (AAR) from December 2020 defines online games as OIDAR services (Online Information and Data-based Access or Retrieval). The ARR further states that cloud based digital games should be subjected to taxation even if the cloud is located outside the borders of India.
Another issue of controversy, as evidenced by the Witzeal case, is whether GST should be applicable to the whole transaction amount or the full sum of the bet, or whether just the operator’s commission or the charged processing and service fees should be taxable. The significance of this question is great, since GST is charged on top of the price or amount the customer pays, and the commissions or fees usually constitute only a small fraction of the full transaction sum.
The matter is even more important for the sustainability of these businesses, since all players and betters are required to pay direct income tax on all winnings and withdrawals larger than ₹ 10,000, regardless of whether the bet has been legal or not. The tax is set at 30 per cent, but should be increased to 31.2 per cent by surcharging the Health and Education Cess (defined at 4 per cent of the tax), and should either be deducted at the source by the product provider, or should be charged and paid manually by the individual player.
Another Challenge to GST Investigation Filed at the Mumbai High Court
Witzeal’s advocate at the Punjab and Haryana High Court, Abhishek A Rastogi, partner at Khaitan & Co, is also representing petitioners from the casino industry who have challenged similar GST demand notices and search actions against them before the Mumbai HC.