The explosive growth of the online gaming sector in India is nothing short of extraordinary. In recent years, this industry has witnessed an astonishing surge, and the momentum shows no signs of slowing down.

Projections indicate that, by 2025, the Indian gaming market will skyrocket to an estimated value of $5 billion. The fledgling industry that was struggling with regulatory challenges has recently received an endorsement of legitimacy with the Ministry of Electronics and Information Technology’s (MeitY) being appointed as the nodal ministry. The ministry has notified regulations for permissible online games.

But the last piece of the puzzle for the industry -- the goods and services tax (GST) conundrum -- still looms large.

A fair tax policy for this industry holds the key to realising its full potential, and to fulfil the vision of India rising to one the global leaders in the gaming sector.

As the next GST Council is expected to convene in July, let us have a look at the history of taxation of online gaming in India and what could be a fair GST framework of the industry.

A history of taxation of online gaming in India

The online gaming industry is about 15 years old in India. Before India embraced GST, online gaming companies were being taxed as an Online Information Data Access or Retrieval (OIDAR) service under the erstwhile Service Tax regime.

Gaming platforms registered for Service Tax under the IT/ITeS category and paid tax on the platform fee charged on players, known as Gross Gaming Review (GGR).

Contributions to the prize pool were considered actionable claims and not subject to service tax or Value Added Tax (VAT). In fact, VAT laws specifically excluded actionable claims. Betting and gambling, on the other hand, were excluded from the ambit of service tax and were under the purview of state legislation for taxation purposes.

This operating model of skill gaming platforms carried over to the GST regime. As India transitioned to GST, gaming companies continued to pay GST on GGR as taxes on income earned from providing technology services to facilitate the games of skill for the users.

But in the 35th GST Council meeting, while the GoM was deliberating taxation for lottery companies, the re-deliberation of GST on online gaming, horse racing and casinos was also initiated. After this, a GoM was appointed to make recommendations for the same.

The GoM report submitted in the 47th GST Council meeting, which is now public, recommended a 28 percent GST on the total consideration or Contest Entry Amount (CEA).

While making no distinction between “games of skill” and “games of change”, the GoM report suggests that any distinction between games of skill and games of chance is irrelevant for the purpose of GST.

However, under the service tax regime, there was a clear distinction between online gaming, and gambling and betting. While online gaming was being taxed as an OIDAR service, betting and gambling were excluded from the ambit of service tax and were solely under the jurisdiction of the state. In view of this, not distinguishing ‘games of skill’ and ‘games of chance’ goes against the historical precedent.

On analysing the report, it emerges that online gaming has been considered akin to betting and gambling, and it suggests that it should be taxed as such.

This is in contradiction to the recent separation, which has been created in the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (‘IT Rules’), between permissible online real money games which have been sought to be regulated, and gambling which has been prohibited.

The new IT rules framed by the government have been considered as a highly conducive and encouraging step on part of the government for promoting legitimate business and encouraging the domestic industry which provides jobs to a number of people.

There is currently a comprehensive tax structure in place for online gaming in the form of a 30 percent TDS on net winnings for users, and 18 percent GST on Gross Gaming Revenue (GGR) for platforms.

Combined with the recent changes to the way TDS is applicable, it is expected that, effectively, no revenue leakage, and the taxation loop is closed.

Any additional tax burden will be a difficult one for the legitimate online gaming industry, which is sought to be regulated by the IT Rules, and may increase their tax outgo manifold.

Such a high tax share may have major consequences. Firstly, the government may lose a substantial amount of tax revenue as users may shift to unregulated offshore betting and gambling platforms, which have already been sought to be blocked off by the government.

Secondly, if users do shift to these unregulated offshore platforms, they will be exposed to various risks and potential harm by resorting to offshore platforms, which lack the regulatory oversight and consumer protections ensured by regulated domestic platforms.

The estimated revenue loss from migration to offshore platforms could exceed Rs 5,000 crore per year, if a 28 percent GST rate is considered.

Over 500 Indian startups, worth over $20 billion and attracting over $2.5 billion in investments and foreign direct investments (FDIs), which are expected to comply with these rules may be at risk due to the proposed higher taxation on the gaming industry.

A significant number of them, out of the 500+ startups, will be at the risk of closing down since a majority of them are in early stages, and funded by venture capitalists. If these startups shut down, tens of thousands of jobs may be under threat.

Recommendations 

In view of the above observations, the GoM should revisit the earlier suggestions and recommend a tax regime that is conducive for the industry, in line with the vision of the government for the sector and aligned to the international best practices, legal status and economic potential of the industry.

Such a tax regime would promote the regulated players who will function under the new IT Rules and discourage customers from migrating to illegal and unregulated platforms, which are harmful for the domestic industry and the citizens at large.