GST Council’s tax shock throws open doors for illegal gaming

Over the past few years, the online gaming sector in India has seen phenomenal growth. The country not only recorded over 15 billion game downloads (the highest globally), but also saw the number of gamers cross the half-billion mark in FY 2021-22, up from 450 million in the previous year. In fact, the sector contributed approximately Rs 2,000 crore to the government exchequer in 2020, and the amount is expected to touch Rs 3,500 to Rs 5,000 crore by 2025.

Over 900 gaming companies have sprung up in the country that offer a multitude of online gaming formats, including real money gaming, which accounts for 77 per cent of the market size.

With the GST Council raising the tax rate on online gaming operators from 18 per cent GST on Gross Gaming Revenue (GGR) or platform fee to 28 per cent GST on Contest Entry Amount (CEA), which is the full value of bets placed, the industry will suffer a critical blow, as the effective increase in the tax burden is over 1000 per cent .

To give an example, previously, if a player staked Rs 100 in a skill-based real money game, the platform would charge a 10 per cent fee, which would include 18 per cent GST, i.e., Rs 1.8, whereas at 28 per cent on CEA, a Rs 100 stake would be either Rs 28 over and above the stake or Rs 22 inclusive. While this is a heavy blow for the industry, the picture isn’t positive for the exchequer either. In fact, a recently released report by Deloitte points to the significant decline in GST revenues that can be expected from the shift, projected to go down by around 72.45 per cent over the next 5 years.

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The enormous rise in the tax burden also creates a dual problem with one singularly dangerous result: the rise of offshore and illegal gaming. Firstly, the investments that the sector has received thus far and potential investments will be heavily impacted due to the change in taxation, which makes the online gaming business far less lucrative.

This will result in fewer platforms willing to venture into the sector, severely impacting innovation in the sector. Secondly, this will discourage players from accessing legitimate gaming platforms that follow the law of the land and pay their due taxes. Both factors will invariably lead to the proliferation of offshore and illegal gaming platforms, effectively reducing revenue generation for the exchequer by way of taxes. It’s a classic case of black-market proliferation. Given that this is a technology-enabled sector, physical boundaries have little meaning, and access to the black market is much more difficult to police. Just two months ago, the Enforcement Directorate conducted a nationwide crackdown on foreign-registered online gaming companies suspected of laundering over Rs 4,000 crore.

These companies operate through multiple alternate means of financial transactions, including hawalas, dark web transactions, cryptocurrencies and other means of evading monitored financial networks. The market size in India just for betting and gambling is estimated to be upwards of Rs 8 lakh crore ($100 billion), with offshore platforms recording as much as Rs 8,000 crore ($1 billion) in monthly deposits from India. Compare this with the domestic online skill gaming market, which generates annual revenue of just over Rs 20,000 crore ($2.5 billion) annually.

Offshore and illegal platforms not only do not pay taxes, but they are also unregulated and have no focus on consumer protection, responsible gaming, grievance redressal, or the prevention of fraud.

Only in the recent past have there been progressive regulations by the central government for the wholesome promotion of the online gaming sector. Further, in an attempt to clarify and streamline the applicability of the tax deducted at source (TDS) and taxation of winnings from online games, the government, in the recently announced 2023 Budget, proposed a 30 per cent tax on ‘net winnings’ from online games.

The government also proposed the removal of the minimum threshold limit of Rs 10,000 for calculating the TDS. Interestingly, Finance Minister Nirmala Sitharaman also mentioned the distinction between “games of skill” and “games of chance” in the Finance Bill when she signalled that both might get a separate tax structure in the future.

The Ministry of Electronics and Information Technology, which is the nodal ministry overseeing the online gaming sector, has also worked expeditiously to notify rules for online gaming in a bid to bring more regulatory clarity to the sector.

Much of this progress will come to a standstill with the GST Council’s decision to tax the online gaming industry at the same level as gambling, with a sin tax of 28 per cent , rather than a more rational 18 per cent , which is levied on the entertainment industry.

It is surprising to see that many of them are reversed now, which would neither reduce the number of individual gamers who have been addicted to online gaming, stop the borderless penetration of online gaming portals, nor promote the indigenous gaming industry, which otherwise could take the lead in the international gaming arena.

Globally, the gaming industry is bigger than Hollywood and the music industry put together. In India, too, the gaming industry was witnessing significant growth and was seen as a significant part of the media and entertainment sectors. PM Narendra Modi has, in fact, emphasised his vision of India becoming a global gaming innovation hub. The huge taxation on online gaming hinders the growth of domestic online innovation, which in turn makes India dependent on online gaming platforms of other countries. This is a double whammy for India.

As gamers increasingly look for immersive mobile gaming experiences, it is not surprising to see that gaming has transformed from being a solitary, individual past-time to an exciting spectator sport with improved user engagement.

A young population, growing ownership of gaming-ready smartphones and access to cheap data have led to sustained growth in online gaming. Clearly, grouping the booming online gaming sector with gambling may not be in its best interests and would in fact push players from legitimate gaming platforms to fill the coffers of illegal and offshore betting and gambling operators.

Instead, a progressive and well-regulated online gaming market would serve consumers better, while also contributing to the country’s digital economy and lead to job creation as well as revenue generation for the exchequer.

If the government is concerned about gamers becoming addicted to online games, restrictions on how much an individual gamer may play can be put in place based on their financial position. With the PAN card linked to the profile of the gamer, it is not difficult to dictate how much each gamer can play based on their individual financial capacity. By regulating the online game, the government can permit online gaming with reasonable taxation and ensure that individuals don’t lose beyond their financial means. Let pragmatism decide the policy paradigm of online gaming.

(The writer is a public policy analyst)