A difference of opinion has been reported between te Ministry of Electronics and Information Technology (MeitY) and the Ministry of Finance (MoF) over the Goods and Services Tax Council decision to impose GST of 28 percent on the turnover of real-money online games, making no distinction between games of chance and games of skill.

There are differences of opinion and differences of opinion. Oppenheimer, the movie, falls short by skipping the actual use of the atomic bomb on Hiroshima and Nagasaki – or the movie is fine as it is, focusing on the moral qualms of the father of the Atom bomb. These are two different opinions, representing difference of opinion of one kind. There is another kind, as between the woman who agrees to King Solomon’s settlement of the dispute between her and another woman over maternal claims to an infant, and the woman, the other party to the dispute, who rejects the settlement: the King had ordered the child to be cut into two equal halves, for each woman to claim one half as her own. The difference between the two ministries of the central government is of the kind that decides between life and death.

Conceptual Errors

The GST Council’s decision on taxing online games has been much misunderstood. The problem is not with the 28 percent tax rate. It is on where the levy falls. The GST Council has decided that the tax would be levied on the turnover, rather than on the fee levied by the gaming company. When a player joins a game, she pays what is called the ‘contest entry amount’. This CEA has two components: the fee charged by the gaming platform, which goes to constitute what is called the ‘gross gaming revenue’, and the balance amount, which constitutes the stake. Till now, gaming companies have been paying GST on the platform fee or GGR. This is like a stockbroker paying GST on the brokerage fee it charges customers who trade securities using its services. The stockbroker does not pay GST on the sum of brokerage plus the value of the trade. But the gaming company is now being asked to pay GST on the gaming turnover, rather than on the fee it earns from it.

This is conceptually wrong: GST is not a turnover tax, but a tax on supplies, from which the supplier claims back tax already paid on the inputs to that supply, rendering the net GST paid a tax on the value added by the supplier. Ideally, the gaming company would pay GST on GGR, and claim input tax credit on the tax component of the expenses incurred to make that GGR materialise.

Another conceptual mistake is conflating games of skill with gambling. The GST Council dismissed any distinction between a game of chance and a game of skill, and decided to treat all online games as games of chance. When a player puts up a stake, trusting his skill to win the game and get his stake back, and secure, besides, the stakes put up by others in the game, he is placed differently from someone placing a wager on an outcome over which he has no influence. It might be useful to recognise that when a player puts up a stake in a game of skill, it is not gambling but when some non-players bet on the outcome of the same game of skill, they are gambling. When Muhammad Ali had that famous rumble in the jungle with George Foreman in Zaire, in Zaire, suppose Ali had placed a bet on himself: would he have been gambling? Most certainly not (boxers, in fact, are permitted to bet on themselves, but not against themselves). But when spectators bet on the outcome, they were just taking a chance, and that would have been gambling.

Dealing a body blow

The winnings in games are subjected to income tax at the highest rate, deeming the winnings to be actionable claims. This is perfectly fine. However, when the stake is eaten into by GST at the rate of 28 percent, the post-tax winning shrinks significantly. This could persuade many players to abandon Indian gaming platforms and switch to ones abroad that escape taxation altogether. This would kill off a burgeoning business, in which many Indian startups have received investment, employed people and built viable operations, and possibly discourage investment in other segments of online gaming as well.

MeitY sees the potential of online gaming — already a $200 billion market, four times as large as movies, globally — as a potential area of entrepreneurship, investment, jobs and income generation.

MeitY came out with rules for online games in March, which the GST Council has not taken into account at all. These provide for Self-Regulatory Organisations for online games, and the guidelines specifically ban gambling and harmful and addictive content. Once games comply with these norms, whatever games remain would be distinct from gambling, and undeserving of the censure that many state finance ministers have brought to bear on online gaming at the GST Council.

Commentators who say the House always wins and online games are all gambling, just do not appreciate that the games in which the House always wins are pure games of chance, and the players play against the House, giving the House scope to skew the odds in its own favour. The real-money online games MeitY wants to promote are games in which the players play amongst themselves, and the House just collects a platform fee, while the individual players’ stakes are pooled to form the winning, which the gaming company does not touch.

While these distinctions are clear enough, gaming companies would be well advised to take the GST Council to court. The failure to distinguish between games of chance and games of skill go against several Supreme Court judgments on the subject. This legal clarity is needed to persuade state governments who see the moral turpitude of gambling in all online games.

The tax demand on the entire gaming turnover goes against the Karnataka High Court verdict of May, which restricted the tax to the platform fees that constitute the gross gaming revenue. MeitY can only argue its case with the MoF. MoF should ideally see online games as a potential growth industry, which unwise taxation could kill, but is choosing to see it only as a source of tax today.

In the story of the goose that laid golden eggs, the man with the knife prevailed, unfortunately. MoF seems inclined to folly, rather than to future growth.