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Retrospective Tax on Online Gaming

Retrospective Tax

  • Context (ET): Online gaming companies currently pay an 18% tax on the commissions they collect from customers.
  • In July 2023, the GST Council decided to levy 28% GST on the full value of online gaming.
  • This rate was made applicable retrospectively.
  • As a result of the retrospective tax, online gaming companies need to pay taxes for past transactions.
  • Retrospective tax is a tax charged for transactions in the past.
  • It simply means imposing an additional tax charge from a specified date in the past.
  • Retrospective taxation allows a nation to implement a rule to impose a tax on certain products, goods, or services from a time before the date on which the law is passed.

History of the controversial Retrospective tax in India

  • The GoI amended the Income Tax Act 1961 and introduced the retrospective tax provision in 2012.
  • It allowed the government to ask companies to pay taxes on mergers and acquisitions (M&As) before that date.
  1. In 2007, Vodafone acquired Hutch for $11 billion. In 2012, the GoI demanded 7990 crores in capital gains retrospectively.
    • The company took the matter to the SC, which eventually favoured Vodafone.
    • Vodafone filed lawsuits against the retrospective tax in international courts, which India lost.
  2. In 2006, Cairn Energy made an internal reorganisation.
    • In March 2015, the GoI asked the company to pay Rs 10,247 crore in taxes on alleged capital gains made by the company in the internal reorganisation.
    • Cairn Energy initiated an international arbitration to challenge retrospective taxation.
    • The international arbitration tribunal ruled in favour of Cairn and asked GoI to pay Rs 8,000 crore as damages to Cairn.

Tax on online gaming

  • As per the new Govt. Tax (TDS) law, effective from April 1, 2023, TDS is being deducted at 30% of the taxable amount (Net winning) at the time of withdrawal.
  • GST Council imposed a 28% GST on funds that online gaming companies collect from their customers. It clarified that 28% GST would apply to the actual cash or equivalent deposits made by players, not to the winning amounts they redeployed.
    • If a bet is placed for, say, Rs. 1,000, and the player wins Rs 300, and if the player again places a bet of Rs 1,300, then GST will be levied only on the initial deposit of Rs. 1000 and not on the winning amount of Rs 300, which is redeployed.
    • Until now, the companies paid a small tax on the fees they charged. The change announced will impose a 28% tax on the amount collected from players in every game.
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