| Mar-19-2021

Tax Implications of the Income from Dream 11 and Other Fantasy Games

Introduction

Virtual  gaming  brings  nostalgia  for  the  video  games  we  used  to  play  in  our  childhood.  Now,  as  we  have advanced,  the  technology  has  advanced,  the  gaming  system  has  too.  From  Super  Mario  in  our  box televisions to the fantasy games in our super-fast smartphones and laptops, the gaming system has evolved to  a  new  level.  Players  are  now  even  earning  money  from  the  very  fun  idea  of  playing  online  games.  The games like PUBG, Call of Duty, Dream 11 and Cricket 11 are played by crores of young individuals who are attracted  towards  becoming  professional  players  in  the  online  gaming.  The  live  streaming  of  PUBG,  the tournaments  in  call  of  duty,  the  skilled  team  composition  in  dream  11,  etc.,  has  been  a  great  source  of income for youngsters and many others. The players and the companies have generated millions of rupees from these platforms. However, with income comes the liability to pay taxes, as where there is an income, there comes the vigilance of the Income Tax Department.

The authors in this article have specifically dealt with the taxability of income earned from Dream 11. Dream 11  is  an  organised  gaming  platform  for  the  admirers  of  cricket,  basketball,  football,  baseball  etc.  This platform provides the player an opportunity to formulate a team based on the skills, knowledge, judgement, evaluation of the statistics and, experience. The player can participate in various contests, both public and private,  with  his  team  by  paying  the  entry  fees.  In  case  the  player  wins,  the  company  after  deducting  the commission, directly transfers the money to his bank account from the escrow account.

In the present article, the authors have discussed the taxability under two heads, firstly, the tax liability of the player on the winning amount in light of the provisions of Income Tax Act, 1961(hereinafter referred to as IT Act) and, secondly, the tax liability of the company on the commission earned in the light of the CGST Act, 2017, and the judicial pronouncements.

Tax liability of the players

Section 42 of the IT Act provides for the basis of charge upon which the income shall be taxed. It states that any income which has been accrued or received by the assessee in the previous year shall be charged in the assessment  year.  Further,  Section  1  43  of  IT  Act  provides  for  various  heads  of  income  for  the  purpose  of computation of total income which includes income from salary, house property, profits & gains of business or profession, capital gains, and income from other sources. As far as the taxability of fantasy online gaming is concerned, the same falls under the ambit of income from other sources under Section 56.

Section 564  of the IT Act provides for the basis of charging taxes on any income that doesn’t fall under first four categories mentioned under Section 14. Sub-section (2) of Section 56 provides that any income which is earned  from  the  activities  mentioned  under  Section  2(24)(ix)  shall  be  chargeable  to  tax  which  includes winnings from lotteries, crossword puzzles, races, card games and other games of any sort or from gambling or betting.5 Further, Section 1  15BB(1) of the IT Act states that such income mentioned under Section 2  (24)

• shall be taxed at the rate the of 30%. Also, the tax on the price money earned through the online gaming shall be deducted at source as per Section 1 94B of the IT Act, if the amount earned exceeds Rs. 10,000. Also, it is mandatory for the assessee to disclose it while filing the return. However, if it is otherwise then, the tax shall be paid by the assessee at the time of filing of returns as per the rates provided under section 115BB(1). Further, the normal exemption limit does not affect the taxability of such income and no deductions are available on the same. Lastly, if the price money is given in kind, other than cash, then the person who is  giving the price is responsible to deduct and pay the tax on the market value of the prize. In case where the prize distributor does not deduct the tax, then such liability is to be borne by him. Hence, for a person   winning the tournament in any of the platform, his income shall be subjected to income

Tax liability of the company

The question of whether Dream 11 is the game of skill or the game of chance has led to various controversies and litigation vis-a-vis applicability of GST on such fantasy gaming companies. The Hon’ble High Court of Punjab6,  Bombay7,  and  Rajasthan8  held  that  the  Dream  11  is  a  game  of  skill  as  it  requires  substantial knowledge  of  the  game,  calculations,  judgement  and  attention.  The  Supreme  Court  has  finally  settled  the position by uphelding the judgement of Bombay High Court and further categorically stated that it is a game of skill and will not fall under the category of gambling or betting that requires no skill and only luck. This clarification has solved the issue of applicability of GST on the companies organising online gaming.

Dream 11 works on the model, wherein the amount is pooled in by various players and after deducting the commission, the balance amount is reserved for the winner. Now here arises two questions, firstly, whether the  GST  will  be  applicable  on  the  total  pooled  amount  or  only  on  the  commission  which  the  company  is earning? And, secondly, what shall be the rate of GST applicable?

Schedule III read with Section 7 of Central Goods and Service Tax (CGST) provides for the activities which are  exempted  from  the  levy  of  GST  as  such  activities  are  not  considered  as  supply  of  goods  or  supply  of services. All the actionable claims fall under the activities mentioned in Schedule III. However, it does not include gambling, lotteries, betting, and horse racing on which the GST at the rate of 28% is applicable. Also, in  the  case  of  gambling,  betting,  and  lotteries,  GST  will  apply  to  the  total  pooled  amount.  However,  the Supreme Court has made it very clear that the income from fantasy games (in this case, Dream 11) shall be considered  as  the  income  from  the  game  of  skill  and  not  the  gambling  or  the  betting  which  are  games  of mere chances.9 Hence, the taxes applicable shall be 18%.

Further,  the  amount  charged  by  the  company  as  commission,  against  the  services  provided  through  the platform for the players, is liable to be taxed and not on the entire pooled amount. Also, Rule 31A of CGST Rules10, 2017, provides for the valuation of supplies in cases of lottery, betting, gambling and horse racing where the total face value of the supplies should be considered for calculating GST and thus is not applicable in the present case. Hence, the GST should be applicable at the rate of 18% only on the commission amount and not at the rate of 28%.

Conclusion

The  taxability  of  the  income  arising  from  the  online  gaming  platform  has  been  decided  by  the  Supreme Court and the legislature for both the companies and the players respectively, still there are various issues which  needs  attention  by  the  legislature  and  the  tax  department.  Though  the  authors  in  this  article  have discussed  specifically  about  the  taxability  in  case  of  Dream11,  the  same  shall  be  applicable  on  the  other fantasy games like Cricket11, MPL, MyTeam11, Halaplay etc.

However, in games like PUBG and Call of Duty, which are also game of skills11, it becomes difficult to track the  income  of  the  players  for  the  purpose  of  taxation  as  generally  the  private  individuals  conduct  the tournaments in a very unorganised manner. They collect the entry fees from the participants and reward the winning  individual  out  of  the  pooled  amount  with  no  deduction  of  TDS  at  the  time  of  paying  the  prize money. Further, there is no traceability of the income of players in such games as there are more of cash transactions,  unlike  Dream  11  where  the  players  have  to  submit  the  identity  proof  and  the  bank  &  PAN details and all the transactions takes place directly through bank account, it becomes highly impossible to determine the tax liability and its compliances. This will have a prejudicial effect on the tax revenue of the department.

Lastly,  by  the  verdict  of  the  Supreme  Court,  it  has  been  made  crystal  clear  that  the  Dream  11  is  not  a gambling  and  is  purely  a  game  of  skill  thereby  attracting  18%  of  the  GST  on  the  income  earned  through commission by the company.