This is a guest post by Pallav Pradyumn Narang, a New Delhi-based Tax and Regulatory Partner at CNK, an accounting, tax and advisory firm.
Recent actions of the department against one of the larger entities in the casino space have brought the issue of valuation of services under the Goods and Services Tax (GST) regime in the gambling industry to the forefront.
If you have been to a casino, you know how the drill works. You buy chips and use them to place bets and play in the casino against other players. The casino on its end takes a small commission from the winnings as its charges for providing the facilities that allow players to play against each other. This commission also called a rake is the main source of revenue for the casino and the casino operator pays GST at the rate of 28% on such rake made.
The department on the other hand has contends that GST ought to be paid on the total value of bets placed by the players and not on the net commission earned by the operator.
The law on taxable value of services is well defined. As per the law, the taxable element for services provided is the “Consideration” charged by the service provider. Consideration is in turn defined as in simple terms as:
Therefore, as per our interpretation of the law tax ought to be payable only on the amount charged by the operator to provide the said service. In this instance the casino charges a small rake to provide gaming services and therefore the rake is the sole consideration.
On the other hand, the GST department seems to believe that the entire bet placed should be taxable. This opinion is no doubt bolstered by a provision of the valuation rules (Rule 31A of the Central GST Rules) which defines consideration in the case of actionable claims 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 totalizator.
Many practitioners interpret this section to apply only to betting in the form of lottery purchase and gambling in race clubs and is not applicable to casinos.
An interesting dimension is lent to this debate by way of another clarificatory circular issued by the GST department which specifies amongst other things that 28% GST would be payable on total bet value. Since circulars are only persuasive in nature being binding on the department and not upon the taxpayers, the controversy remains unabated.
An examination of facts and the economics of the casino industry is in merit to dispel this cloud of uncertainty, since the operator earns only a fraction of the bet placed, it is needless to add the department’s contention has been and will continue to be vigorously contested by operators.
The department and lawmakers represented in GST council can take a leaf from the books of European countries who have much greater experience and clarity as far as taxation of gaming revenues is concerned. Many European countries have excluded gaming services from VAT entirely and rely only on direct tax revenues from the industry.
With respect to valuation, countries like Malta have clear guidelines that define consideration as:
(i) Where the supplier receives a commission or participation fee (typically referred to as the ‘rake’), the said commission or fee (including when the commission/fee is settled using bonus credit) shall be regarded as the consideration for the service, which shall be deemed to be inclusive of VAT.
(ii) In all other cases, the consideration received by the operator shall, for the purposes of determining the taxable value, be an amount equivalent to the revenue of the supplier, i.e. the total stakes/bets placed by players (including bets placed using bonus credit) less the winnings and other amounts paid out to players in connection with that bet (including bonus credit comprised within the bets placed). The consideration shall be deemed to be inclusive of the VAT.
The definition clearly specifies that the taxable component shall be:
This exhaustive definition seems like breath of fresh air and I am certain operators and their tax advisors would love to have this included within the realm of Indian regulations just as well, given that it also perhaps allows for deductions of losses made on tournaments etc.
In the absence of this clarity, the industry will have to fight against departmental action based on logic and facts which are not bad allies in any case.
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Read more about the gaming industry and gambling laws in India.