Taxman seeks info from foreign online gaming companies

The communiqués from the arms of the Central Board of Indirect Taxes and Customs, which administers the goods and services tax (GST), are not conventional notices, which can only be served under a separate protocol to an overseas entity.

“The letters were sent about six weeks ago,” a person aware of the letters told ET. “They (tax officials) are trying to get a sense of the extent of money that is finding its way to offshore gaming companies. We don’t think these foreign firms keep separate records of users from various countries.”

Typically, importers of services pay GST — the common indirect tax that came into effect from July 1, 2017 — on a reverse charge basis.

However, in case of import of online information and database access or retrieval services (OIDAR) by unregistered, non-taxable recipients, the supplier located outside India is responsible for tax payment.

Thanks to the low value, high volume nature of the transactions, it’s virtually impossible to track and identify residents remitting funds overseas to bet or play on online platforms. “Most are using international credit cards. Few may be using the money that was earlier sent abroad under the liberalised remittance scheme (LRS) and has been lying in a foreign bank account…No way would one get to know such fund transfers,” said a tax practitioner advising some of the companies.

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Unlike the Rs 20 lakh threshold for levy of GST on domestic entities, tax is applicable on various cross-border services without any cut-off. A 15% penalty can be imposed if the tax department believes GST was “intentionally avoided.”
OIDAR services are sold over the internet and received by the recipient online without having any physical interface with the supplier. As per this definition, 18% GST is applicable on automated services involving minimum human intervention. Thus, services offered by a gaming or overseas cryptocurrency platform would attract GST.

Matter of Jurisdiction

However, the Indian tax department does not have the jurisdiction to shoot off a notice to an overseas platform. According to international law, such letters must be routed through the ministry of external affairs to its counterparts in that countries.

The current missives are thus in the form of a request from the tax department. A senior tax official accepted sending emails to overseas online companies, saying they are “queries” and not tax notices.

“We have sent queries to some online gaming companies and we have received few responses,” the official said, adding that it was becoming difficult for them in case of offshore online gaming companies and that some of the player databases were shared by the Income Tax Department.

The official said lack of clarity regarding GST on online gaming and loopholes in the law make it easier for overseas gaming platforms to evade tax.

Evasion of GST by local online gaming companies is estimated at Rs 22,936 crore from April 2019 to November 2022, though officials suspect actual evasion could be much higher.

There are also differences of opinion on whether residents transferring funds to these online platforms are in violation of the Foreign Exchange Management Act (FEMA). “Clearly, LRS cannot be used for gambling. But what if the user calls it a ‘profession’?” said a senior lawyer.

Earlier this year, the Karnataka High Court had ruled that a blanket ban on online gambling is unconstitutional. The court felt this went against the “right to practice any profession or to carry on any occupation, trade, or business” under Article 19(1)(g) of the Constitution.

In June and July, information on GST was sent to a number of overseas gaming platforms to increase awareness and sensitise them on how they could be liable to pay tax in India. The recent set of letters aim at collecting more specific information.