Will lead to death of majority new age gaming startups

The proposed increase will impact innovation, employment, FDI and growth in the sector, and is unlikely to increase revenue collection for the exchequer

The Goods and Services Tax (GST) Council of India is planning to impose the highest taxation slab, also known as “sin tax”, upon the digital gaming sector. A sin tax is a GST specifically levied on certain goods deemed harmful to society, for example, gambling, or horse racing. The Council’s proposal suggests that the official view is leaning on equating (and taxing similarly) gambling with online gaming, and radically reforming the mode and tax rate of online gaming. Under the current regime, an 18% GST is imposed on the commission earned by a digital gaming platform. Under the proposed regime, a 28% GST is proposed to be applied on the Gross Gaming Value (GGV), i.e., the total Contest Pool. Practically, the proposal will increase the imposed tax by a striking 55%. If implemented, the proposal will pose existential risk to the booming digital gaming sector, and may irreversibly influence its commercial viability.  

What is the GGV?

Taxing gaming companies on the GGV is like charging banks with GST on the Gross Transaction Value. Or like charging a taxi driver based on the wealth of their passenger. Or a landlord based on the value of business conducted from their tenanted premises. Policymakers must appreciate that the GGV is, by no means, the income earned by a game organizer. The GGV is just the sum of contest entry buy-ins, held by online gaming companies in a fiduciary capacity, to generate a “pool” of winnings, which is disbursed back to the contest winner/winners, after deduction of the platform commission.

What do Gaming Platforms charge a Platform Fee for?

Operators of online games of skill provide a stable back-end technology for the smooth functioning of gaming activities on their platforms. They do not participate in contests between players. That is why, in the erstwhile tax regime, players’ contribution to the prize pool was consistently treated as an actionable claim, with no service tax or value-added tax being applied to it. This model of operation of skill gaming platforms (and taxation), persists today. It has been carried forward in the GST regime too, and the online skill gaming industry continues to discharge GST on the platform fee charged to the player of the game for the backend/technology facilitation service provided by the gaming company. 

Sin Tax rests on Questionable Legal Ground

The move to introduce a “sin tax”, and treat digital gaming like gambling, also rests on shaky legal ground. The Constitution of India lists “betting and gambling” as a State subject, giving States the power to regulate them. Section 65B (15) of the Finance Act, 1994 defines “gambling” as ‘putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring’. Courts have offered interpretive guidance on the matter too. In Junglee Games vs. State of Tamil Nadu, the Hon’ble Madras High Court has clarified that the ambit of betting and gambling is limited to betting on activities based on chance only. In All India Gaming Federation vs. The State of Karnataka & Ors., has similarly observed that the term ‘gambling’ is confined to games of chance. So, betting and gambling would appear to concern only those cases where winnings depend merely on the occurrence of a chance or accident (i.e., game of chance). Given this background, Rule 31A of the CGST Rules, which applies to lottery, betting, gambling, and horse racing, may not apply to online skill-based gaming platforms. This means that the proposed overhaul in the tax regime applied to online skill-gaming may likely be unconstitutional. It is also risky and regressive. These proposal must also be seen contextually, with increasingly aggressive posturing by enforcement arms. Market research suggests that the Directorate General of GST Intelligence (DGGI) has questioned 65-70 online gaming companies since October last year without any show-cause notice to “check” for tax evasion.

Online Gaming not for the 1%

The ”sin tax” is problematic for yet more reasons. Consumers of goods and services which are similarly subject to “sin tax” are mainly the elite of our society. In contrast, digital gaming platforms are used by 507 million Indians mainly comprising mid to lower income strata majorly from tier II and tier IV cities where consumers are extremely price sensitive. So, digital skill-gaming represents (financially and digitally) the most accessible form of entertainment, cognitive skill development, and stress-releasing activity, for these classes. The introduction of “sin tax” will likely push digital skill-gaming outside the reach of this price-sensitive audience, and significantly deter users from skill-gaming. 

Funding Cold Wave for Online Gaming?

As users and engagement declines due to high taxation, revenues will erode. The sector’s turn towards profitability will become inordinately difficult. This may cause a major drop in foreign direct investment (FDI) inflows into this sector too. And that at a time when investors are highly judicious and sensitive about their fund-allocation, and push portfolio companies towards profitability. The gaming sector, which continues to be a sunrise actor, is worth $2.5 bn, with $500 mn+ investment from leading investors in Q1 of 2022. 

Sin Tax will hurt Innovation

The “sin tax” will also hamper innovation in digital gaming, which has the potential to create extensive disruption, especially with the emergence of the metaverse and its promise of immersive experiences for end users. Its impact will extend to other industries too. A game not only includes software but is intertwined with featuring realistic or interactive graphics, characters, music, and other ancillary content embedded into such games, which leads to creation and development of Intellectual Property and new technology.

Sin Tax will hurt Employment

The “sin tax” will stunt the massive employment potential shown by India’s digital gaming industry. Currently, the gaming industry consists of a workforce of about a lakh employees, of whom at least 15 percent of the workforce is comprised of programmers and developers, who are at the forefront of developing new technology and fostering innovation in India. The Compound Annual Growth Rate (CAGR) for online gaming witnessed a whopping growth rate of 38% and it is expected to become a $10 billion dollar industry in the next five years. The increase in GST will affect growth. 

Sin Tax counter-productive

Most of all, though, the proposed “sin tax” deserves a serious re-look because it may have a counter-intuitive and counter-product impact on the overall income of the digital gaming sector, and result in reduced tax collections. India’s history is replete with examples where regressive tax measures have irreversibly threatened and hurt industries’ competitiveness, and resulted in reduced tax collections. One hopes that a similar sunset does not fall upon India’s online gaming industry.