All goods things take time and so far 2023 has been a year which has been beneficial for the online gaming industry. Early this month, the Ministry of Electronics and Information Technology’s (MeitY) ruling on online gaming perfectly exemplifies this. After a long wait, the industry finally heaved a sigh of relief early this month, when MeitY cleared the ambiguity around online gaming versus betting or gambling through clear definitions and permitting only certified online games. Another key issue that has been addressed is TDS on winnings from online gaming, the amendments in the Finance Act 2023 have been welcomed by the industry, the rules for which are yet to be issued.

The recent initiatives of the government seem to have created a positive outlook, for the industry, investors and also the consumers of online gaming services, one big question that remains to be resolved is that of GST. Industry experts opine that GST will have a major bearing on the viability and growth of the industry, any undue burden that may be imposed will undo the positive developments so far.

Despite the new rulings, which clearly segregate gambling from online games, taxation still remains an area of concern. To be sure, online games that do not amount to gambling, and betting currently pay 18% goods and services tax (GST) on gross gaming revenue (GGR), also known as the platform facilitation fee. Every user is charged a fee when they decide to participate in a paid game. However, if this rule is changed in the future as there is a possibility of the government increasing the tax slab to 28% but not just on GGR but rather on the total consideration amount. For example, if there is a total pool of Rs 100, an online gaming company typically charges 10-15% as a platform fee, which is Rs 10-15. In the proposed scheme of things as opposed to levying a tax on just the platform fee, it has been suggested that a 28% GST should be imposed on the total sum of Rs 100. If this is enforced then the GST structure for then OGIs will be subjected to the same GST structure as gambling and lottery. 

The GoM report, which was submitted in the 47th GST Council Meeting, and made public now, relied on the lack of clarity on the legal status of the online gaming industry and compared the industry with gambling, betting and lottery to arrive at a recommendation to tax on the total consideration. Early this year, in an interview with CNBC TV18, Vivek Johri, chairman of the Central Board of Indirect Taxes and Customs (CBIC) said all online gaming companies characterised as offering gambling or betting services are liable to pay 28% GST on the full value of the bets. 

Ever since this report was presented and the council has directed the GoM to re-examine the recommendations, there have been multiple developments, which may raise questions on the basis on which the GoM recommendations were made. With MeitY as the Nodal Ministry and with IT Rules for online gaming, the legal status of any online game will become clear and as a consequence also decide the applicability of GST on each online game.

Only games that will be certified by the self-regulatory body, as permissible real money games that is, games that do not amount to wagering on the outcome, will clearly need to be treated distinctly from games that are in the nature of gambling, and betting.

The other concern that the government had was revenue leakage on the direct tax side on the income from prize pool money. The amendments in the finance act 2023 have effectively plugged this leakage and the net winnings are taxed at the highest rate of 30%. Industry experts argue that post these changes, any additional tax burden on the online gaming industry will make it difficult for the industry to survive & grow.

What is needed is alignment between various ministries of the government, especially between MeitY and the Ministry of Finance on the treatment of games that are certified under the IT Rules. The IT Rules also provide clarity to the tax department on classification of games offered by the online gaming intermediaries for the purpose of GST.