The recently concluded 50th GST Council meeting took a toll on the online gaming industry. The Council decided to levy 28 percent tax on online gaming on full ‘face value’, clubbing it in the same league as casinos and horse racing. The industry feels that this decision will have a chilling effect on the sector, however, the players are awaiting fuller details.
India is home to nearly a thousand start-ups in gaming sector. This space, considered a sunrise sector that has already attracted some US$2.5 billion in investments, has a great potential of employment and export.
In a post-Budget talk in 2022, Prime Minister Modi stressed on the importance of online gaming, acknowledged its international market, and said that India is exploring to increase its footprint in the sector. In one of the biggest global deals in this sector, Microsoft recently acquired Activision Blizzard, a US-based gaming company for US$69 billion. All these could be indicators of the global potential of this sector.
However, the industry in India, worth multi-billion dollars, is worried about not just the new GST imposition but also its overall implications on the industry. Post this tax decision, fearing heavy losses, some companies may even plan to close or move offshore.
Viability is in question
The industry outcry however has been around the change in taxable value from the operator’s revenue to “full value”, i.e., the users’ contribution to the prize pool and the operator’s revenue. This change in methodology for levying GST on online gaming may increase the tax liability several times over and, in the process, severely hurt the industry’s viability.
The government has bracketed online gaming with casinos and horse racing for taxation; while this in itself may be understandable, the cascading effect resulting from taxation on full value may be the biggest damper. While the casinos are being taxed at 28 percent on face value with no tax on further redeployment of winnings, the effective rate of taxation for the online gaming industry is actually not 28 percent but works out to more than 50 percent.
As an illustration, a person walking into a casino buys chips worth INR 100 at the entrance and pays 28 percent GST on the same. Any subsequent bets are then exempt from GST. He may re-deploy his winnings as many times as he wishes, and no subsequent GST would be charged.
Cascading tax effect
However, for an online gaming user, he enters a contest with INR 100 and pays a 28 percent GST on it. Now if he wins back INR 150 and redeploys it, he once again pays 28 percent GST on the same rupee. This is repeated every time he redeploys the winnings. Due to this cascading effect, the effective rate of taxation jumps from 28 percent to over 50 percent depending on the number of times the users re-deploy their winnings and the operator’s revenue. This is in contra-distinction to casinos.
It is interesting to note is that in the report submitted by the Group of Ministers (GoM) during the 47th GST council meeting, it is understood that the they after considering the same taxation structure for casinos decided against it. They recognised that there needs to be a balance between tax revenue and the viability of the casino’s operations. As a result, the GoM concluded that taxing each round, once the tax is collected on the deposit, would not be feasible and would make the casinos unviable. The same consideration should also be accorded to the online gaming industry.
The objective of the GST regime was to bring in simplicity and reduce ‘cascading tax effect’ by a single, unified tax in the form of GST. The decision to tax the same rupee over and over again goes against the principle of GST and principle of equity, and it heavily penalises the digital businesses, particularly, online gaming companies.
The solution
A simple solution could be to bring in uniformity and tax the online gaming industry on deposits. This might soften the blow on the online gaming industry --which no doubt will still be battered--but may just get enough oxygen to live another day. It will effectively and truly level the field, while also increasing the GST collections and allowing the industry to innovate under the new tax structure. It would be truly a win-win for all the stakeholders, including the government for balancing their socio-economic concerns.
It would be in the best interest of the online gaming industry if the taxation regime is relooked. The proposed self-regulatory bodies can be tasked to frame rules, including taxation, in consultation with the industry, global best practices and as per judicial decisions. India is a rising economy having digital power and a setback to one of the core sectors of digital economy may dampen growth. Online gaming needs to be taxed wisely, taking into account all implications, including employment, revenue and exports.
— The author, Dhanendra Kumar, is an Ex. IAS and former Chairman, Competition Commission of India, and former Executive Director for India at World Bank. He is currently Chairman of Competition Advisory Services with inputs from Aditya Trivedi, Associate, COMPAD LLP. The views expressed are personal.
India is home to nearly a thousand start-ups in gaming sector. This space, considered a sunrise sector that has already attracted some US$2.5 billion in investments, has a great potential of employment and export.
In a post-Budget talk in 2022, Prime Minister Modi stressed on the importance of online gaming, acknowledged its international market, and said that India is exploring to increase its footprint in the sector. In one of the biggest global deals in this sector, Microsoft recently acquired Activision Blizzard, a US-based gaming company for US$69 billion. All these could be indicators of the global potential of this sector.
However, the industry in India, worth multi-billion dollars, is worried about not just the new GST imposition but also its overall implications on the industry. Post this tax decision, fearing heavy losses, some companies may even plan to close or move offshore.
Viability is in question
The industry outcry however has been around the change in taxable value from the operator’s revenue to “full value”, i.e., the users’ contribution to the prize pool and the operator’s revenue. This change in methodology for levying GST on online gaming may increase the tax liability several times over and, in the process, severely hurt the industry’s viability.
The government has bracketed online gaming with casinos and horse racing for taxation; while this in itself may be understandable, the cascading effect resulting from taxation on full value may be the biggest damper. While the casinos are being taxed at 28 percent on face value with no tax on further redeployment of winnings, the effective rate of taxation for the online gaming industry is actually not 28 percent but works out to more than 50 percent.
As an illustration, a person walking into a casino buys chips worth INR 100 at the entrance and pays 28 percent GST on the same. Any subsequent bets are then exempt from GST. He may re-deploy his winnings as many times as he wishes, and no subsequent GST would be charged.
Cascading tax effect
However, for an online gaming user, he enters a contest with INR 100 and pays a 28 percent GST on it. Now if he wins back INR 150 and redeploys it, he once again pays 28 percent GST on the same rupee. This is repeated every time he redeploys the winnings. Due to this cascading effect, the effective rate of taxation jumps from 28 percent to over 50 percent depending on the number of times the users re-deploy their winnings and the operator’s revenue. This is in contra-distinction to casinos.
It is interesting to note is that in the report submitted by the Group of Ministers (GoM) during the 47th GST council meeting, it is understood that the they after considering the same taxation structure for casinos decided against it. They recognised that there needs to be a balance between tax revenue and the viability of the casino’s operations. As a result, the GoM concluded that taxing each round, once the tax is collected on the deposit, would not be feasible and would make the casinos unviable. The same consideration should also be accorded to the online gaming industry.
The objective of the GST regime was to bring in simplicity and reduce ‘cascading tax effect’ by a single, unified tax in the form of GST. The decision to tax the same rupee over and over again goes against the principle of GST and principle of equity, and it heavily penalises the digital businesses, particularly, online gaming companies.
The solution
A simple solution could be to bring in uniformity and tax the online gaming industry on deposits. This might soften the blow on the online gaming industry --which no doubt will still be battered--but may just get enough oxygen to live another day. It will effectively and truly level the field, while also increasing the GST collections and allowing the industry to innovate under the new tax structure. It would be truly a win-win for all the stakeholders, including the government for balancing their socio-economic concerns.
It would be in the best interest of the online gaming industry if the taxation regime is relooked. The proposed self-regulatory bodies can be tasked to frame rules, including taxation, in consultation with the industry, global best practices and as per judicial decisions. India is a rising economy having digital power and a setback to one of the core sectors of digital economy may dampen growth. Online gaming needs to be taxed wisely, taking into account all implications, including employment, revenue and exports.
— The author, Dhanendra Kumar, is an Ex. IAS and former Chairman, Competition Commission of India, and former Executive Director for India at World Bank. He is currently Chairman of Competition Advisory Services with inputs from Aditya Trivedi, Associate, COMPAD LLP. The views expressed are personal.
First Published: Aug 1, 2023 9:45 AM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
