VALUE OF SUPPLY IN THE DIGITAL AGE: GST IN ONLINE GAMING
~by Ujjwal Gupta, Dr. Ram Manohar Lohiya National Law University. Khushi Jain, Dr. Ram Manohar Lohiya National Law University
INTRODUCTION
India’s gaming industry ranks as the 5th largest globally, and the market size is projected to reach USD 5.02 billion by 2026. When a player deposits ₹100, the platform charges a very small fee (for example, ₹10), and the remaining ₹90 is allocated to the prize money. But taxes are imposed on the full entry amount (₹100), which results in taxing the platform on the total flow rather than the actual earnings. As a result, the industry ends up in a situation where tax is payable even with cancelled games or player losses.
After the 2023 GST amendments and the recent Supreme Court decision in Directorate General of Goods and Services Tax Intelligence & Ors. v. Gameskraft Technologies Private Limited on GST for online gaming, the main questions are classification and pricing of gaming transactions – should taxable value be the entire amount deposited by players or just the economic value kept by the platform?
The blog firstly assesses the existing framework governing the GST applicable to online gaming. Secondly, it explores the doctrinal and practical issues from taxing the total value. Lastly, the blog advances a plausible legislative reform proposal modelled on foreign jurisdictions through a phased implementation structure.
LEGAL FRAMEWORK
GST under the Central Goods and Services Tax Act, 2017 (“CGST Act”), is charged on the “value of supply” of goods or services. While Sections 2(31) states that “consideration” includes any payment made “in respect of” or “for the inducement of” a supply. At the same time, it excludes deposits except where they are used for the supply. Section 15 ties the taxable value to the payment price for the supply.
Before 2023, online skill gaming platforms typically discharged GST at the rate of 18% on their platform fees. According to the industry practice, contest entry amounts were considered to be split into two parts: the operator’s facilitation fee, which is the payment for services rendered, and the prize pool, which is kept separately for the winning participants. In Gurdeep Singh Sachar v. Union of India, the Bombay High Court classified fantasy sports activities like Dream11 as games of skill and held that tax should be levied on platform commissions, not on the entire contest value.
Major changes have been made to this position after the 2023 amendments in the CGST law. The government, on the recommendation of the GST Council, brought in Rule 31B of the CGST Rules, 2017 from 01 October 2023, which applies only to valuation methods in online gaming. Accordingly, the value of supply will be the total amount of funds deposited, with or paid to the supplier, by the player or the player’s representative, including both money and virtual digital assets. In particular, it excludes granting tax relief for refund, returned balance or prize payout, only reused winnings being exempted from double taxation.
Significantly, the Supreme Court in May 2026 in Directorate General of GST Intelligence v. Gameskraft Technologies held that online gaming operators are suppliers of actionable claims arising from organised gaming activities. It further recognised that participation involving monetary stakes on uncertain outcomes creates taxable actionable claims under the GST framework.
Therefore, the revised system removes the previous GGR-based approach and introduces a complete 28% face value taxation model. Thus, games predominantly involving skill may attract similar valuation treatment if they involve monetary stakes and actionable claims.
CHALLANGES IN THE CURRENT GST FRAMEWORK
A key challenge in the present GST regime is its departure from the foundational concept of “consideration” under the CGST Act as discussed above.
The above chart highlights that while only 10% of the transaction constitutes the platform’s real income, GST is imposed on the entire amount, thereby taxing funds that do not accrue to the platform.
The recognition of online gaming as a supply of actionable claims answers the question of taxability but does not necessarily determine the measure of taxable value. In indirect taxation, the existence of a taxable event and the valuation of that event are conceptually distinct inquiries. The present framework effectively assumes that the entire amount deposited by players constitutes the value of supply, notwithstanding the fact that a substantial portion may subsequently be redistributed as winnings. Whether such redistribution affects valuation remains a matter deserving closer examination.
Another serious concern is the distortion of the economics of the platform and the market viability. The effective taxation will be uneconomic relative to the revenue generated. This can have the impact of discouraging genuine operators from participating. Assessing GST on ever-changing pooled amounts, refunds, cancellations or forfeitures engenders practical, valuation and other compliance problems.
Further, the retrospective imposition of extensive liabilities raises concerns regarding regulatory certainty, investor confidence and the legitimate expectations of businesses operating in the rapidly evolving digital economy.
COMPARATIVE ANALYSIS
Even assuming actionable claims are taxable, several jurisdictions still calculate tax on operator margin rather than gross player deposits.
In the United Kingdom (“UK”), a great majority of betting and gaming is out of the scope of VAT as the size of players’ is not regarded as the payment for a taxable supply. The guidance issued by HMRC views the stake money as 100% out of the scope of VAT , as it is not regarded as the payment for any supply, even if operators were to hold , representing their customers for a very short time. Instead, the gambling duties like General Betting Duty, Pool Betting Duty and Remote Gaming Duty are applied. These are determined based on the operator’s profits, i.e. stakes received minus winnings paid out. Because of this, the UK system regards the operator’s net receipts as the taxable event and recognises that a large part of the pooled funds never become the operator’s income.
Online gambling supplies are included in the GST regime in Australia in the same way. The taxation of online gambling supplies in Australia is based on the “global GST amount” under section 126 of the GST Act. It refers to the procedure for calculation of GST on gambling supplies, which is predicated on total wagers minus monetary prizes. Accordingly, GST is derived as 1/11 of this amount, which aligns the tax base to the operator’s GRR. Also, according to para 106 of AASB 15, payments made by customers ahead of the receipt of the related goods or services are recorded as liabilities, which indicates that those amounts are not revenue. Besides, state-level point-of-consumption taxes on wagering are, by and large, calculated as a share of net wagering revenue or player losses, which further demonstrates that taxation should be based on net operator earnings.
Singapore has a more disciplined approach to regulation, but it leads to pretty much the same fiscal result. Under the Gambling Control Act, private online gaming is nearly entirely prohibited, with authorised operators like Singapore Pools dominating the sector. Taxation is done through betting and sweepstake duties, and is usually calculated as a certain percentage of net bets, i.e. stakes received minus winnings paid and applicable GST adjustments. Casino taxation works in the same way, based on GGR. While GST is included in calculating gambling duties, it is not directly levied on wagering transactions. Rather, the duties are determined based on bets after deducting winnings and GST, so the tax is essentially only on the operator’s retained margin.
Across these models, the common principle is that only the operator’s margin or net receipts form the tax base while prize pools are considered as the passthrough funds. This is very different from India’s current model, where the whole amount of the deposit is subject to tax.
CUSTODIAL CHARACTERISATION AS AN ALTERNATIVE REGULATORY MODEL
While the preceding analysis demonstrates that the current valuation model departs from the concept of consideration and international practice, these concerns also expose a deeper conceptual question regarding the legal character of player deposits. If player funds are viewed not as the platform’s own receipts but as monies held for a specific purpose, a custodial framework offers a coherent doctrinal basis for both improved governance and a more economically accurate approach to taxation.
(i) Fiduciary Duties
At present, platforms function through terms and conditions. However, if treated as custodians, they would owe duties like a trustee with functions in a fiduciary capacity as held in Board of Trustees of the Port of Bombay v. Dilipkumar Raghavendranath Nadkarni. This is in harmony with the Indian Trusts Act, 1882, which mandates that a trustee must act exclusively for the benefit of the beneficiaries. Platforms would also be under an obligation to make sure that the funds are only being used for the intended purpose (i.e., enabling gameplay and paying out winnings) and not for their own operational or financial benefit in any way.
The exercise of their control over the terms of contracts can also cause a more thorough judicial examination under the Indian Contract Act, 1872. Platform-dominated Standard form contracts can be accused of violating fiduciary duties. E.g., contractual terms allowing the platform to unilaterally confiscate the funds or arbitrarily suspend the accounts.
(ii) Mandatory segregation of player funds
At present, many platforms operationally mix user deposits with their own working capital. But, when considered as custodians, the monies are not to be regarded as part of the platform's assets, and separate escrow accounts and ring-fenced player funds would be created. This method has its counterpart in the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992, and payment system modes overseen by the Reserve Bank of India (“RBI”). This encompasses licensing requirements, KYC norms, audit trails and very stringent measures for safeguarding of funds.
(iii) Regulatory oversight and Transparency
In the absence of transparency in aspects such as matchmaking, competition format or distribution of funds, such acts can fall within the ambit of unfair trade practices as per the Consumer Protection Act, 2019. Any act of changing results or hiding significant information like the amount of prize pools or the commission charged will amount to breach of trust. Platforms should be quite explicit with their users about how the money is handled under the Information Technology Act, 2000.
(iv) Insolvency implications
At present, it is difficult to ascertain the status of player funds if a platform goes bankrupt. But, if such monies were placed in trust, they would not form part of the liquidation estate per the Insolvency and Bankruptcy Code, 2016. This would mean that player funds are third-party assets. This way gives users priority protection and shields their deposits from creditor claims.
SUGGESTIONS AND REFORMS
A coherent resolution lies in primarily adopting a Platform Fee (Commission-Based) Taxation Model, which aligns the levy of tax with the actual economic substance of online gaming transactions.
It inculcates Deemed Split-Supply Model that suggests a clear distinction between:
Player-to-player pool (prize money) and
Platform service fee (commission).
Only the platform fee or commission should be treated as “consideration” for the purposes of taxation under the CGST under Sections 2(31) and 15.
Second, a Trust-Based Taxation Model based on fiduciary principles can be deployed. Under this approach, the pooled entry amounts can be statutorily recognised as trust property held by the platform on behalf of players. This characterisation ensures that such funds are legally distinct from the platform’s own assets and cannot be treated as their income or consideration for GST purposes. Consequently, only the platform fee, being the true remuneration for services rendered, would form the taxable base.
Third, a Transaction-Level Netting Mechanism, which reorients GST computation to reflect actual retained value post-outcome can be adopted. Instead of taxing deposits at the entry stage, tax liability would arise after the conclusion of the game, once the platform’s revenue component is crystallised. Such an approach addresses practical issues relating to refunds, cancellations, and forfeitures and aligns with the doctrine of time of supply under GST law by linking taxation to the point at which economic gain is realised.
Additionally, a Dual-Tax Structure Model can be considered to balance revenue interests with doctrinal coherence. Under this framework, GST would apply strictly to the platform’s service fee, while a separate mechanism such as a withholding tax or TDS-like levy could be imposed on player winnings. This ensures that taxation is appropriately distributed between the service provider and the beneficiary of the economic gain, rather than artificially inflating the platform’s taxable base.
Lastly, introduction of a Regulatory Sandbox Tax Framework inspired by policy initiatives of the RBI in the fintech sector can be looked upon. Selected gaming platforms could be permitted to operate under alternative tax treatments on a pilot basis. It would allow regulators to evaluate its impact on revenue, compliance, and market behaviour before implementing large-scale reforms.
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