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Actionable Claims in the GST Era: Impact on Tax Incidence and Recent Changes in Digital Gaming Services

Authored by Shikhar Verma, (Intern), a 3rd-year Law Student at Dr. Ram Manohar Lohiya National Law University, Lucknow

Actionable Claims in the GST Era
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Introduction to Actionable Claims

Actionable claims are a unique form of property that bestows certain rights and obligations upon the claimant. Unlike tangible assets, actionable claims lack physical presence and remain unsecured. In legal terms, a suit concerning an actionable claim represents a demand for “property” distinct from claims associated with secured debts.

An actionable claim denotes a debt or claim for which legal action can be pursued in a court of law to seek resolution or redress. An unsecured debt is an obligation to pay a certain amount of money, originally transposed in the Property Act, from the Roman principle Lex Anastasiana. Civil courts recognise such claims as legitimate grounds for relief, whether they are contingent, conditional, or accruing. Essentially, an actionable claim encompasses a claim to a debt, excluding those secured by mortgages of immovable property, hypothecation, or pledge of movable property, or to any beneficial interest in movable property not under the claimant's possession, which courts acknowledge as warranting relief.

In simpler terms, actionable claims represent debts or claims for which individuals can seek legal recourse through court proceedings for recovery. However, not all claims are actionable. They must pertain either to a debt or to a beneficial interest in movable property, with the property not being in the possession of the claimant.

Different definitions are attached to the actionable claims under different legislations: (a) The Transfer of Property Act governs the transfer of actionable claims, outlined in chapters eight, except the claims for decree or judgment debts, claims for damages arising from contracts or torts, mesne profits, and intellectual property rights such as trademarks, patents, and copyrights are excluded. Also, under the Central Goods and Services Tax Act, 2017, actionable claims are considered 'goods'. The Act defines actionable claims in line with the Transfer of Property Act, encompassing unsecured debts or beneficial interests in movable property not possessed by the claimant.

In essence, actionable claims encapsulate a distinct category of property rights with legal ramifications for the claimant, warrant attention in both civil and tax law contexts.

Impact of GST on Actionable Claims: Challenges and Clarifications

The Goods and Services Tax Act, implemented on July 1, 2017, introduced a value-added tax on most goods and services for domestic consumption. It applies only to items defined within section 2(52) of the CGST Act, aiming to reduce ambiguity but leading to inconsistencies in financial instrument classification and unsecured debt taxation.

This inconsistency, particularly regarding actionable claims, posed challenges for the financial market, contributing to decreased transaction volumes in the 2017 fiscal year due to GST uncertainty. While section 2(52) includes actionable claims in the GST scope, section 2(102) excludes money and its transfer from the service definition.

Recognising this, the GST council issued clarifications, exempting actionable claims and debt transactions from GST, except for lottery, betting, and gambling. Despite this clarification, the GST Act inadequately addresses the movable property aspect of actionable claims, leaving a significant portion undefined and unregulated, potentially leading to legal disputes and hindering commerce.

Recent Changes in Taxation of Digital Gaming Services

The 50th GST Council Meeting previously subjected Online Gaming and Casino earnings to varied tax rates, with skill-based games taxed at 18% and Games of Chance at 28%. Following the 51st Council Meeting directive, a uniform 28% GST will apply to Online Gaming, Casinos, and Horse Racing. However, only the amount deposited by players, excluding previous game winnings, will be taxed. The amendments aim to clarify the taxation of these activities, addressing concerns raised by various associations.

The recent CGST (Amendment) Act, 2023 and notifications from CBIC enforce the 28% GST on Online Gaming, Horse Racing, and casinos, effective from October 1, 2023. Payments made using Virtual Digital Currency will also be subject to GST. Furthermore, recommendations were made for streamlined registration of foreign suppliers offering online gaming services in India.

The 'All India Gaming Federation' seeks clarification on these amendments. Despite GST imposition, the legality of Online Gaming remains subject to individual state laws. The GST Council acknowledges the need for clarity regarding the 'Place of Supply' for Online Gaming.

The decision to levy GST on Online Gaming, Horse Racing, and Casinos, though contentious, is viewed as addressing social concerns and ensuring tax equity. The levying of such a heavy tax would undoubtedly shift to the player because if the platform were to bear tax liability, the platform fee collected would be less than the GST payable, thus rendering the business unviable. The gaming industry has raised these concerns regarding potential negative impacts on revenue and increased black-market activity. 

Analysis of Actionable Claims in Gaming Service

The Bombay High Court ruled in Gurdeep Singh Sachar v UOI that funds pooled in an escrow account for online fantasy gaming constitute an actionable claim, as they are distributed among winning participants. Also the Karnataka High Court issued an interim order in Gameskraft Technologies v DGGI, halting a GST payment demand on alleged services provided by an online gaming company through its platform. The court is deliberating whether the gaming company's activities involve transactions in actionable claims, with the decision anticipated to impact the online gaming sector significantly. 

The proposed GST implementation aims to broaden the exceptions in Schedule III of the CGST Act 2017 to encompass online gaming, aligning it with lottery, betting, and gambling, which are currently subject to GST. This suggests an amendment to Clause 6 to tax the pot value in online games, referring to the total amount paid to enter contests. Currently, the GST regime differentiates between games of skill and games of chance, taxing the former at 18% and the latter at 28%. However, the proposal suggests imposing a higher tax rate on the pot value instead of the Gross Gaming Revenue (GGR), which is the platform fee or the difference between the amount wagered and won.

To implement this, the CBIC has introduced Rules 31B and 31C to the Central Goods and Services Tax (Third Amendment) Rules, 2023, mandating the total amount paid by players as the value of supply for online gaming and actionable claims in casinos, shifting the tax focus to the pot value. Furthermore, the 2023 Budget introduces a 30% tax deduction at source (TDS) on total winnings from online games starting the financial year 2023-24 under Section 194BA of the Income Tax Act, 1961. Guidelines issued by the CBDT outline these provisions, resulting in a significant tax burden on the online gaming industry.

Impact of Changes on Tax Incidence

Recent tax reforms in India's online gaming sector have sparked concerns regarding reduced earnings and player engagement. The introduction of a 30% TDS on all winnings could diminish player earnings, potentially dampening motivation for online gaming. Furthermore, the burden of filing taxes on microtransactions for players outside income tax brackets may deter participation. Additionally, the removal of the TDS threshold places a heavier compliance burden on gaming operators, contradicting the government's aim to ease business operations in the sector.

These tax changes raise several concerns. Firstly, higher taxes may impede innovation and investment, hindering industry evolution. Secondly, the increased tax burden may force smaller gaming companies out of business, leading to market consolidation and reduced competition. Moreover, the uniform 28% GST rate across all games is deemed unfavourable, suggesting a need for a more balanced tax structure.

India's imposition of a 28% GST on contest entry fees and 30% TDS on net winnings sets a harsh precedent globally, adversely impacting the online gaming industry.

The industry's future hinges on striking a balance between revenue generations for the government and fostering an environment conducive to growth and innovation. Collaborative efforts between the government and industry stakeholders are essential to develop a fair and sustainable tax framework that supports responsible gaming practices and sector competitiveness. Policymakers must reassess these changes to ensure they promote industry growth while maintaining a fair taxation system.

Conclusion and Future Outlook

Actionable claims, representing legal rights to demand something from another party, introduce a unique aspect to property rights in the online gaming sector, raising complex legal and tax considerations. Recent changes in taxation, particularly the implementation of GST and the introduction of TDS on winnings have generated significant concerns within the industry.

The introduction of GST on online gaming activities has created uncertainties and challenges, leading to decreased transaction volumes. While efforts have been made to clarify the framework, specific issues remain, especially regarding the treatment of actionable claims within the GST ambit. Recent amendments, such as broadening exceptions and imposing taxes on the pot value, aim to address these challenges, but their effectiveness needs further evaluation. Furthermore, the 30% TDS on winnings has raised concerns about reduced player earnings and increased compliance burdens for operators. These tax changes could potentially hinder industry growth, leading to market consolidation and decreased competition.

Moving forward, collaboration between policymakers and industry stakeholders is crucial to developing a balanced and sustainable tax framework. This framework should promote responsible gaming practices while fostering industry competitiveness. Revisiting the taxation regime would greatly benefit the online gaming industry. Entrusting proposed self-regulatory bodies with the formulation of comprehensive rules, including taxation, through collaboration with industry stakeholders and drawing from global best practices and judicial precedents is advisable. India, as an emerging economy with significant digital prowess, risks hindering growth by neglecting a core sector of its digital economy. Taxation of online gaming requires careful consideration of all ramifications, encompassing employment, revenue, and exports, to ensure a balanced approach that fosters industry sustainability.

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