The Goods and Service Tax Council recommend that the “full value of bets” in online gaming be taxed at 28% on 11th July 2023. The Council’s decision impacts the real money gaming industry, the largest segment of the online gaming ecosystem which previously came under the 18% tax bracket, applicable only to their service fee.
Stocks of list gaming companies plummeted by 20% to 24% 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 associate with real money games.
The real money gaming segment fetch a revenue of around $2.5 billion in 2022.
🚨 Just in: 127 gaming startups and industry bodies have written an open letter pleading against the 28% GST on deposit value
— The Arc (@thearc_hq) July 15, 2023
Says the move will lead to "significant job losses"
They have urged the government to consider 28% GST on platform fee instead
Full letter 👇 pic.twitter.com/xIWEim6myK
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.
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 leverage core strengths in one area and invest their surpluses in others.
Platformisation enables users of one specialise 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 allow them to segue into other domains such as fintech, video streaming, merchandising/e-retail, digital assets, and content production.
For example, Dream Sports, the parent company of Dream 11, has establish 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% GST.
If the player wins the round and decides to re-deploy her winnings say Rs 120, will this amount again attract a 28% GST?
Such ambiguities must be resolve by the GST Council which is slate to meet again this week to clear the path to implementation.
The increase in the tax rate for online gaming will now stratify a relatively uniform taxation approach that digital services have enjoy 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 subsum under the GST.
The reality of GST 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.
So, 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.
Another unintend consequence of the GST Council’s 11th July 2023 decision is that casinos and online gaming are now taxed at the same rate of 28%.
Such false equivalence ignores a long-held legal standard that distinguishes between games of skill and games of chance.
Many 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.
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%.
India’s taxation policies have a singular focus boost revenue collections.
So, in order to accommodate 21st-century industries, India must transcend such a maximalist ethos.
