On 11 July, the Goods and Service Tax Council recommended that the “full value of bets” in online gaming be taxed at 28 per cent. The Council’s decision impacts the real money gaming industry — the largest segment of the online gaming ecosystem — which previously came under the 18 per cent tax bracket, applicable only to their service fee. Stocks of listed gaming companies plummeted by 20 to 24 per cent on average.
The GST Council’s decision will increase the tax liability on real money gaming ten to twenty times. Consumers will have to bear the commensurate increase in gaming costs. They may also shift to offshore websites that are outside the regulatory perimeter. Such an outcome will dent the Union government’s recent efforts to provide users with a safety net through the recent online gaming rules under the Information Technology Act. These rules aim to address financial and behavioural risks associated with real money games.
A sunrise sector
The real money gaming segment fetched a revenue of around $2.5 billion in 2022. Online gaming generates $132 million in digital advertising revenues and employs over 1,00,000 people — a majority of them engineers, researchers and designers from the information technology sector.
More importantly, the new GST regime will stymie digital platformisation, a key factor behind the success of global technology majors. Google is no longer just a search engine and Microsoft is no longer just an operating system — these companies leveraged core strengths in one area and invested their surpluses in others. Platformisation enables users of one specialised service to interact with those of another. It also equips digital companies to offer higher degrees of customisation and quality of service to their users. Strategic diversification of this nature is near impossible without growing revenue streams or the centrifugal force of cash flows powering such businesses.
Successful online gaming companies are among the most profitable digital businesses in India. This has allowed them to segue into other domains such as fintech, video streaming, merchandising/e-retail, digital assets, and content production. For instance, Dream Sports, the parent company of Dream 11, has established a $250 million corporate fund to invest in a diverse range of adjacent market segments.
The revision in the tax policy could lead to a cascading impact. Generally, players redeploy their winnings from one round in the game to play another round. For example, now a player who deposits Rs 100 will pay Rs 128, as the deposit amount will attract 28 per cent GST. Subsequently, if the player wins the round and decides to re-deploy her winnings say Rs 120, will this amount again attract a 28 per cent GST?
Such ambiguities must be resolved by the GST Council which is slated to meet again this week to clear the path to implementation.
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One nation one tax
The increase in the tax rate for online gaming will now stratify a relatively uniform taxation approach that digital services have enjoyed in both the pre-GST era and under the present GST regime. The premise behind the GST was that India should have a single tax on goods and services, rather than a bouquet of different taxes such as the service tax, octroi, state VAT and entertainment tax among others. All of these now stand subsumed under the GST.
The reality of GST, however, is quite different. India has four GST slabs above zero. A World Bank study indicates that out of the 115 countries with a GST system, India is one of only five countries which uses these many tax rates. Moreover, services and goods of the same type have varied GST rates. The decision to increase the tax rate on online gaming demonstrates that the GST regime exhibits stratification, deviating from the original aim of uniformity.
Games of skill vs chance
Another unintended consequence of the GST Council’s 11 July decision is that casinos and online gaming are now taxed at the same rate of 28 per cent. Such false equivalence ignores a long-held legal standard that distinguishes between games of skill and games of chance.
Several Indian courts have applied the chance-vs-skill principle to permit real money games to operate, including most recently in the case of Gameskraft v. Directorate General of Goods Services Tax Intelligence. Courts have held games of skill to be those where players invest time in learning, practising and honing their skills. Their success is contingent on their superior knowledge of the game, training, attention and experience. In contrast, players’ success is contingent on randomness in games of chance — three aces in a pack of cards, the roll of a dice, or the same symbol that appears across all segments in a slot machine.
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Way forward
Commendably, Rajeev Chandrasekhar, the Minister of State for Electronics and Information Technology, has said that he will request the GST Council to reconsider the decision. The Council must vaccinate the online gaming industry against regressive taxation. A first dose of the vaccine should provide some clarity about the cascading impact on wallet deposits. Else, the sector runs the risk of being crippled even in the short term. And second, India must reinstate the platform fee as the basis for taxation. It is one of the few major economies to tax the full value of deposits and the only one to do it at a high rate of 28 per cent. India’s taxation policies have a singular focus — boost revenue collections. However, in order to accommodate 21st-century industries, India must transcend such a maximalist ethos.
The authors work at Koan Advisory Group, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.
Disclaimer: Koan Advisory Group provides advisory services to a few online gaming companies
(Edited by Theres Sudeep)