During the Covid-19 pandemic, the Lords Select Committee of the British Parliament had the occasion to review two interesting and related phenomena essential for the smooth functioning of any political economy, more so a democracy. One, legal certainty and two, conflict between guidance and law. On the first aspect, the committee made very pertinent observations – “Legal certainty is an essential component of the rule of law. In order for people to understand what the law requires them to do, or refrain from doing, the law should be free from ambiguity and uncertainty.
Ordinary people must be able to predict with reasonable confidence when and how legal powers can be used against them, on the basis of clear and accessible information.” On the second aspect, the Committee noted the vital role that clarificatory guidance statements play in ensuring the smooth functioning of democracy – “Guidance and media statements have the potential to enhance legal clarity by explaining the law in non-technical language, thus improving its accessibility.”
These observations are relevant to all aspects of a political economy – be it the maintenance of law and order amid a pandemic or be it the smooth administration of a taxation system during the emergence of a new business model. It is the latter instance that is of interest here and important in the context of this analysis. The online gaming industry has emerged as an exciting new business globally and Indian policy makers are aptly and swiftly responding to the challenges of administering this emerging system. The Central Government, in December 2022, amended the Government of India (Allocation of Business) Rules 1961 to allocate to the Ministry of Electronics and Information Technology (“MeitY”) the ‘matters relating to online gaming’. After due public consultation, MeitY notified the Online Gaming Rules in April 2023. On the tax front, the GST Council deliberated the taxing models and amended the GST Acts and introduced specific definition of “online gaming” and laid out that they will be taxed at 28% on the full value of deposit with effect from 1st October 2023. However, various central and state tax authorities have issued 71 demand notices to the industry where 1.12 lakh crore has been demanded on the ground that the tax levy on online gaming at 28% is applicable from July 2017 when GST was introduced and not from October 2023 from when the amendments to the GST Acts were brought into effect, by way of notifications. The legal uncertainty around this question of whether the said amendments are applicable prospectively or retrospectively has left the industry crippled.
Firstly, it is an indisputable fact that the notification giving effect to the 28% GST levy on the online gaming industry comes into force from 1st October 2023. If it was the intent of the legislature to provide retrospective applicability to the same, the notifications should have appropriately mentioned the effective date of the legislation to be 1st of July 2017 or whatever other date deemed appropriate. It is necessary to appreciate that the legislature has the competence to retrospectively impose any tax but when the notification specifically mentions 01st October 2023 as the relevant date, the issue should end there. In a nutshell, when the law requires a thing to be done in a particular manner, it should be done in that manner or not at all.
In this context, it is helpful to note that the Hon’ble Supreme Court has multiple times held that amendments which are merely clarificatory can be considered as retrospective in operation. However, the amendments in question introduced new definitions and special provisions to be complied with in the supply of “online money gaming” and deemed “online money gaming” as a “specified actionable claim”. It is also important to note that actionable claim involved in or by way of betting, casino, gambling, horse racing, lottery and online money gaming are subject to the levy of GST and shall be treated as goods.
The Apex Court has repeatedly held that even though an explanation begins with the expression “for removal of doubts,” so long as there was no vagueness or ambiguity in the law prior to introduction of the explanation, the explanation could not be applied retrospectively by stating that it was only clarificatory. Thus, the online gaming amendments, no way being clarificatory, unless notified from a date other than 1st October 2023, shall not have retrospective applicability.
It is necessary that the Government and the GST Council pay attention to bring legal certainty on the matter so that the industry, investors and its many employees are not left hanging in the dark. The legal uncertainty in question here seems to be a communication gap between policy makers and administrators in the field. The minutes of meetings of the GST Council and the notifications which brought about the amendments to the GST Acts do not talk of any retrospective application. It is for the Council to use the guidance/clarificatory statements as an effective tool to communicate its intention to the field officers and put an end to unnecessary litigation, particularly when the industry has duly abided to the new tax regime. This will also go a long way in ensuring the confidence of investors and industries is upheld with no fear of retrospective taxation under the GST regime. .
The writer served in the Indian Revenue Service for more than three decades.