JOIN USUnder the erstwhile Service Tax law, almost all race clubs in the country faced a conundrum: on what amount were they to discharge their Service Tax liability -- the total stake money received by them from persons who bet, or on the commission charged by the club for conducting the races and distributing the monies received to the winners?
Logically, it should have been on the commission they received, but court decisions have gone either way, resulting in the fact that these race clubs transitioned to GST without any clarity on the amount on which they would have to discharge their liability. They thought clarity was provided by Heading 9996 in Notification No 11/2017-Central Tax(Rate)-28 June 2017, which stated that "services provided by a race club by way of totalisator or a license to bookmaker in such club would be taxed at 28%."
Though this was an improvement over the erstwhile law, the value on which GST needed to be paid was not clearly stated. Principles of valuation under GST are enshrined in the provisions regarding Value of Supply. Section 15(1) of the CGST Act defines value of supply to mean the transaction value - which has further been defined to be the price actually paid or payable for the said supply of goods or services or both, where the supplier and the recipient of the supply are not related, and the price is the sole consideration for the supply.
The textbook definition of price is the amount of money expected, required or given in payment for something. In the case of race clubs, the only amount they require and expect participants to give in payment is their commission. The stake money is entirely optional and voluntary - this amount is something that the race club does not determine and hence does not expect or require.
It has been reported recently that Bangalore Turf Club has received an educative note from the tax department that they need to discharge their GST liability on the entire amount they receive and not only on the commission, as the club has been doing. It is not too difficult to decipher why the department is taking this stance - the amounts involved are large and the difference in tax, if one goes by the tax department's reckoning, is about four times the liability by the club's reading. It will only be a matter of time before other racing clubs get educative notes, too.
Section 2 (102) of the CGST Act defines "services" as anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Race Clubs charge a separate consideration (commission) for using the money paid by all the bookmakers to distribute prize monies amongst the winners. The usual way is to take the entire amount from the bookmaker and reduce their commission before the amounts are distributed - the deduction could be considered a separate consideration.
Contentious note
In its note, the Commercial Tax department seems to have claimed that the service provided by a race club by way of totaliser is a principal supply for which the club has to pay GST on the entire amount. Section 2(90) of the CGST Act defines "principal supply" to be the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
Section 2(30) of the CGST Act defines "composite supply" to be a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
Here is an illustration: where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is 'composite supply' and supply of goods is 'principal supply'. We can slice and dice the activities of a race club to the minutest detail but the only activity that can be considered to be a supply would be conducting of races and distribution of prize monies, for which they charge a commission.
For a moment, if the tax department does not look at this transaction from the viewpoint of the amount of tax they could gather but from a realistic perspective, it can be seen that the business model of a racing club is not very different from that of a stockbroker or a travel agent - both of whom are liable to GST only on the income (commission) they earn and not on the moneys that pass through them.
The GST dilemma that race clubs find themselves in today has all the ingredients of becoming a long-drawn-out litigation if it is not fixed immediately. While the GST Council is busy simplifying the compliance aspects of the law, they also need to keep an eye out for needless litigation.
Budget 2018 will provide an opportunity for Finance Minister Arun Jaitley to clarify that race clubs need to discharge their GST liability only on the commission they receive. All that needs to be done is for the CBEC to issue a notification similar to VAT Notice 701/29 issued by the HMRC in the United Kingdom.
The notice defines stake money as the money paid by each player which is risked in the game and is returned as winnings to the winning player(s). The notice clarifies that it is outside the scope of VAT as it is not consideration for any supply by, for example, the gaming club to the player. GST laws in India desperately need such clear and unambiguous notifications.
(The writer is a Bengaluru-based tax expert)