The online gaming industry is waiting for the Group of Ministers to meet in early September for the new goods and services tax (GST) policy. The industry has been verbally contesting against the GST introduced by the government, suggesting 28% tax on the contest fee. While the tax rate is higher– from 18% to 28%, the basis of industry’s ire is not just the rate but the valuation on which it is being imposed– which is the contest fee. “The current 18% tax levied on platform fee or the gross gaming revenue (GGR) is in accordance with international best practices. Taxation on prize money instead of gaming revenue can lead to a collapse of the business model of the majority of platforms legally offering online games of skill. This can also lead to reduced tax collections for the exchequer and give a boost to the growth of black-market operators. A fair and equitable taxation method has to be the way forward,” Joy Bhattacharjya, director general, FIFS, told BrandWagon Online. 

Over the last couple of years, the gaming industry witnessed a surge in userbase as well as cashflow. From fantasy to real-money to casual, all segments of the online gaming industry saw newer audiences coming onboard as well as new companies entering the domain. According to the latest BCG-Sequoia India report, the Indian gaming industry generated $1.8 billion in revenue in 2020. This is expected to triple to over $5 billion by 2025 on the back of the ‘mobile first’ phenomenon, despite the industry standing at one percent of the global gaming market.

https://youtu.be/vZJtKGQSs9o

The Tax Conundrum

In July, the Group of Ministers (GOM) led by Meghalaya Chief Minister Conrad Sangma presented a report recommending that online gaming activities should be taxed at flat 28% on the full value of consideration, without making any distinction between games of skill and chance. Despite the fact that the Supreme Court had passed a verdict in 2021 stating that fantasy and card based real money games such as Rummy are games of skill and not chance. Hence, the report suggested was not received well by the industry and the GoM decided to revise the report and reconvene. As per that report, the GoM had decided to put 28% tax on contest fee as opposed to platform fee. “We laud the efforts of the GoM in following an open and consultative process. They have met us and tried to understand our perspective while drafting the new report on GST,” Roland Landers, CEO, AIGF, stated.

To give a perspective, contest fee is the money that a player puts into the platform at the time of entering the contest. While platform fee, is the token money that company keeps for levying the service. For instance, if a user is playing rummy for a price pool of Rs 1000, then he/she is putting in Rs 100 from his pocket to enter the contest. If and when the player wins the contest, he/she walks away with Rs 100. Of the Rs 10 the player has put in, the company will keep anywhere between Rs 5-10 (depending on the platform fee they charge which varies from 5-10 percent). This is their main revenue.

Industry experts claim that the GOM’s initial recommendation of charging 28% GST on contest fee will result in gaming companies seeing nearly 1100% rise in tax imposed. This will have a heavy impact on the gaming industry which is mostly full of start-ups, bringing about the death of most of the companies who won’t be able to take the burden of the heavy taxation. As per industry estimates, there are over 800 gaming companies in India and post this taxation policy, very few will be able to survive. “The government is treating the online gaming industry at par with gambling. This is one of the main reasons for proposing a 28% tax slab for us,” Aman Gupta, AVP finance, Witzeal Technologies Private Limited

On the gamer’s side, the cost to participate in the game will go up by 300% for gamers under this proposed tax policy. Thereby, forcing gamers to limit their participation and also push them into off-shore, illegal gambling websites as their cost of playing will go up. This will result in gaming industries losing userbase.

On the other hand, if the GST Council simply levies 28% tax on platform fee or gross gaming revenue then the companies will see 50-53% rise in taxation. In this case, either the gaming industry has to reduce the platform fee charged or the prize pool offered. If they reduce the platform fee charged, they will take a hit on revenue and if they reduce the prize pool, they might face a loss of userbase.

The Government Point Of View

The Indian government has demonstrated its support towards the industry multiple times. The sector, which contributed Rs 15 – 20 billion in 2020 to the government exchequer and the same is expected to reach Rs 35 – 50 billion by 2025, is considered a sunrise sector by the government. To the extent that in Budget 2022, The government set up an animation, visual effects, gaming, and comic (AVGC) task force for the development of the sector. 

As per industry sources, the GST council has categories for industries on which they increase/decrease tax. Currently the GST Council currently does not have any category named ‘Gaming’. Earlier gaming used to fall under the ‘Online Services’ category but it was now brought under ‘Gambling and Betting’ which includes casinos. Hence, only 18% tax was levied on the category earlier while now it was brought up to 28%. 

Furthermore, the government wanted to impose the tax on actionable claim which the council saw as prize pool. According to the GST Act, an actionable claim is a claim to any debt. However, platforms argue that the prize pool itself is not a debt for them. Moreover, Bombay High Court gave a judgment stating the prize pool cannot be considered as an actionable claim. 

The Way Forward

Internationally, the gaming industry pays anywhere between 10-20% as tax to the government, depending on the country’s taxation policy. The ideal situation for the industry would be to fall in this bracket itself. The previous report, which blurs the lines between game of skill with game of chance, might just cause a legislature anarchy, resulting in userbase erosion and foreign disinvestment.

The Group of Ministers are expected to meet in early September for the GST on gaming industry. And then in the latter half of the month The GST Council will lay out its ruling. The industry is waiting with bated breath to see whether the government lays out a policy in their favour or not.