Can the Indian Online Skill Gaming Industry Expect a Supportive Tax Policy from the Government? 

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Can the Indian Online Skill Gaming Industry Expect a Supportive Tax Policy from the Government? 

  • The Sector’s Potential Has Been Recognized and Support Has Been Promised. But Will the GST Regime Back All This Up?

The Indian online skill gaming industry has been registering remarkable growth over the last few years and has made the country one of the top five mobile gaming markets globally. The Central Government, including Prime Minister Narendra Modi, has recognized the potential of the sector and has pledged to support it through various initiatives which are already underway. However, one question of major importance remains – will the pending changes to the GST regime continue this support or will they instead devastate the industry?

The market size of the homegrown online skill gaming sector has been estimated at ₹7,900 crores for the Fiscal Year of 2021-22 and has been projected to grow to ₹15,000 crores in FY 2023-24. The tax contributions from the industry amounted to ₹1,500 to ₹2,000 crores for 2020 and have the potential to reach ₹3,500 to ₹5,000 crores annually by 2025.

PM Modi has on many occasions recognized the potential of the Indian gaming industry to generate economic growth, create jobs and make the country a global gaming superpower through ‘Create in India and Brand in India.’ The Minister of Electronics and Information Technology has also expressed his support for the homegrown gaming businesses.

Following the announcement of the Union Budget for FY 2022-23, the Central Government formed the Animation, Visual Effects, Gaming, and Comics (AVGC) task force which will soon deliver its report with recommendations for the promotion of the industry.

Another inter-ministerial committee was set up and mandated to elaborate a suggestion for a uniform regulatory framework for online gaming, focusing on ease of doing business, compliance burden, promotion of the industry, and protection of players’ rights, privacy and safety.

Government Still Struggling to Find the Right GST Policy for Gaming

All the support promised or already given to the online gaming industry might be in vain, as well as all the expectations for growth and economic prosperity might be ruined if the government fails to come up with an adequate taxation regime. As GST policymakers are still struggling to find the right set of GST rules for gaming, the industry is concerned that a wrong move mixing skill gaming and online casino real money games together may devastate the sector with over-taxation.

As of the moment, chance gaming, including casinos, lottery and horse racing, is taxed with GST at 28 percent over the full ticket value of placed bets. Online skill gaming platforms, on the other hand, are charged 18 percent GST over their Gross Gaming Revenues (GGR), or the small margin operators keep as a fee for the provision of their services. The larger portions of what players pay to participate in a game, i.e. the Contest Entry Fee (CEF) which goes to the formation of the prize pools for the winners, is currently exempt from GST levy.

This regime, however, does not leave prize pools tax-free, as the taxes on online gambling winnings stipulated by the Indian income tax legislation apply to all games and platforms, and online fantasy sports, poker, online casinos and sportsbooks, horse races and lottery are all subject to the same treatment.

The income tax on any gaming winnings or withdrawals above ₹10,000 is set at a flat rate of 30 percent plus a surcharge for Health and Education Cess of 4 percent, making the effective rate 31.2 percent. Winnings above ₹50 lakh or ₹1 crore are subject to additional surcharges of 10 or 15 percent respectively.

The Group of Ministers (GoM) which was appointed in May 2021 by the GST Council to examine indirect tax applicability and valuation matters for online gaming, casino, lottery and horse racing had its recommendations report returned for reconsideration by the country’s apex GST policy body.

While the GoM’s revised recommendations have still not been submitted, reports suggest that the panel is mulling over a uniform GST levy at 28 percent for all gaming varieties which is to be applicable to the full transaction value of tickets or bets.

From the point of view of a skill gaming operator, this would constitute a drastic hike in the tax burden of 900 or more percent. If a player currently pays ₹100 to participate in a game, out of which the platform fee is ₹10 and ₹90 go to the prize pool, the operator would be charged ₹1.8 in indirect tax. If the GST valuation rules are amended as described above, the effective GST in the same instance would be ₹22 if the ticket price is kept at ₹100.

Platforms would either have to raise CEF by 28 percent or lower prize pools by the same proportion, while the 31.2 percent income tax plus Cess remains applicable for winners. Such a development would drive gamers away from law-abiding and tax-paying platforms and into offshore or black market playing options. A number of gaming companies will be forced to close or move their operations abroad, resulting in a substantial decrease in tax revenues for the exchequer.

If the government implements such a non-supportive and detrimental tax policy, it will not only render all efforts to promote the homegrown online gaming industry pointless but will also go against the well-established judicial practice to differentiate games of skill from games of chance.

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