The industry currently pays 18 percent GST on Gross Gaming Revenue (GGR), which is the revenue earned by them as facilitation fee. However, the Group of Ministers (GoM) set up by the GST council, in its latest report has recommended 28 percent GST on the total value of Contest Entry Amount (CEA) for online gaming activities at par with casinos, lottery and racecourses.

The online gaming sector in India has grown exponentially over the past few years. The country is home to over 900 gaming companies and over 400 million online gamers, according to venture capital fund Lumikai’s 2022 report on State of India Gaming.  

As per a study by EY & ASSOCHAM, the online gaming industry contributed over Rs. 2,200 crores in GST in 2022 and online gaming market in India is projected to grow from $2.8 billion in 2022 to $5 billion in 2025, growing at a CAGR of 28-30 percent. 

With the rise of online gaming, many illegal and fly by night operators have cropped up in the nooks and corners of the country preying on vulnerable players and offering gambling, betting in the name of online gaming. Multiple states in India have been fighting illegal/unlicensed operators which have emerged within the ecosystem. 

In April 2023, the Enforcement Directorate unit of Gujarat froze 5 bank accounts with over INR 3.44 crores in connection with illegal online betting racket. These bank accounts were being used to place bets on illegal online betting apps/platforms. These platforms have been running money laundering rackets and duping players of their hard-earned money. Most of these platforms run their operations from tax havens outside India, entirely circumventing tax obligations. And this may only be the tip of the iceberg.

The Regulatory Structure 

The online gaming industry has come a long way since 2017 when multiple states in India were imposing arbitrary bans on the sector. Acknowledging the potential of this sector, the government has taken a huge step towards regulating online gaming by appointing MeitY as its nodal ministry. 

Further, the new amendments to the Intermediaries Rules (Intermediary Guidelines and Digital Media Ethics Code) have reduced the existing ambiguities with an intent to promote user safety and foster innovation. The new amendments have been able to draw a line between online gaming and gambling, betting; terms that were used interchangeably. 

But, despite a supportive regulatory framework, there remains friction between the industry and the government in terms of the tax structure.

Taxation and proliferation on offshore betting companies

The sector has been under the spotlight of tax authorities for the past two years. The industry currently pays 18 percent GST on Gross Gaming Revenue (GGR), which is the revenue earned by them as facilitation fee. The Group of Ministers (GoM) set up by the GST council, in its latest report has recommended 28 percent GST on the total value of Contest Entry Amount (CEA) for online gaming activities at par with casinos, lottery and racecourses. 

The industry has appealed to the government to levy taxes on the Gross Gaming Revenue (GGR) which is earned by operators and not the total CEA. If the council decides to levy 28 percent on CEA, the tax payout of the online gaming companies will increase by over 1000 percent, in some cases even exceeding the revenues earned by the platforms. 

The gaming platforms will have to pass on this exorbitant cost to the users, making the cost of playing legitimate online games prohibitive for the users. This will present an opportunity for the illegitimate offshore betting companies - masquerading as gaming platforms - to lure the customers in and proliferate the market.  

According to a media report, some of the major offshore operators providing services illegally in India, receive deposits worth USD 1 billion, i.e Rs 8,000 crores which translates to more than Rs 1 Lakh crore annually. These operators, who are mainly operating from Curaçao & other locations, do not pay any tax and operate in complete violation of Indian laws. 

Despite the prohibition orders by the government, these platforms continue to operate with new URLs and IDs. MeitY, through its regulatory framework and the SRB oversight is hoping to curb this illegitimate industry and protect users from exposing themselves to such platforms, in a bid to further their vision of enabling Open, Safe, Transparent and Accountable (OSTA) internet of the citizens of India.

Unreasonable taxation will further result in revenue leakage for the exchequer and pull the curtains down on a sunrise industry that has the potential to make India a global gaming superpower and enable the PM’s 1 trillion economy digital economy. Over taxation of legitimate platforms will defeat the efforts of providing a safe environment for online gaming. 

The current taxation framework of 18 percent of GGR is the most conducive for the industry to grow responsibly while ensuring that the users are given a safe and accountable gaming environment. A fair regulatory and taxation regime will help build this environment which will be spearheaded by the government and will have support from the industry. 

A conducive and fair taxation regime for online gaming will increase revenue to the government in the long run and subsequently curb illegal operators in the country. 

Lessons from the UK Case Study

Prior to 2001, The UK had a CEA-based tax regime for the online gaming industry, where the operators were charged 6.75% on the CEA. Due to the high taxation, the industry was struggling to stay compliant and make profits, and the online gaming platforms started moving to offshore locations with better tax models. With the operators offshore, they were not required to pay tax on the gross revenue generated from the customers in the UK, which caused a loss of duty revenue for the government.

Looking at the negative impact of the decision in 2001, the Government scrapped the turnover model and introduced the GGR-based tax model in 2003. Since then, major gaming companies have reported a significant decline in the level of offshore gaming activity, as a direct result of removing the tax incentive to use unlicensed bookmakers. 

As a result, the industry turnover rose by an average of 35-40 percent. Even in the United States, GST is levied on GGR instead of CEA. The exact GST rates vary from state to state, but majority of states levy a GST rate ranging from 7 percent to 16 percent. 

The Government has been at the forefront of some solid policy decisions such as the National Logistics Policy, The India Stack and United Payment Interface (UPI), and the vision for an Open, Safe & Trusted and Accountable (OSTA) internet, which changed the face of India nationally and internationally. It is imperative to form a balance between taxation and regulation that would eventually help the sector to grow without causing any hindrance to its development. 

In this regard, my recommendation would be to implement a rational, long-term and sustainable taxation framework and consider global best practices before deciding on the tax structure for online gaming.