India’s online gaming industry has witnessed exponential growth in the past decade, mainly driven by increased adoption of smartphones and internet. Growing at a breakneck speed of 20%, the sector’s revenue generation potential has caught the attention of policymakers and regulators, paving the way for multiple regulatory frameworks.

The most recent regulatory impact being faced by e-gaming players is on the Goods & Services Tax (GST) front. In its last meeting, the GST Council decided to categorise online gaming on a par with betting and gambling activities, subjecting it to a higher levy, typical for the sin category of goods and services. Thus, all online gaming activities—be it gambling, online casinos, sports betting, or skill-based games such as online one-on-one chess or rummy—are to be treated the same and taxed at the same rate. Prior to this GST Council decision, the industry had taken a view that some e-games were to be classified as games of skill, and only the platform fees charged would attract 18% GST.

In accordance with the recommendations of the 50th GST Council, the amendment has widened the value base on which the 28% rate is leviable; it now includes the gross value deposited with the gaming company. It has caused ripples in the online gaming industry, which believes that the rate and base are prohibitively high, and shall impact the industry’s future outlook. Consider a plain vanilla e-gaming scenario—a game of online chess— wherein ‘Player A’ and ‘Player B’ contribute Rs 100 each, creating a pool of Rs 200 for the winner. The impact of the amendment means that at the time of the deposit of money, the winning pool is reduced to Rs 144. The gaming company would ideally charge a 10% commission and factor withholding tax of 30% on net winnings; the winning pool will further shrink to Rs 120. In other words, a player will now risk 100, with the hope of winning20—a worthless risk-reward outcome!

However, the principal concern remains with regards to the implication of the amendment. Though the GST amendment prima facie appears to be a substantial change to the regime, the lawmakers have labelled it as ‘clarificatory’, making it suggestive of retrospective application. Unlike a substantive amendment, a clarificatory amendment is not intended to change the law substantially but merely clarify it. The Supreme Court has clarified that if an order/amendment is with respect to the original rule, it ceases to be ‘clarificatory’ or ‘explanatory’. This is predicated on the principle that such clarificatory rules inherently carry with them the power to alter the original rule. Alternatively, amendments that, in their nature and purpose, seek to clear doubts or to rectify an obvious error in statute, are generally clarificatory and would have a retrospective application. Viewed from a principle of statutory interpretation, the recent amendment to impose a tax on the entire amount deposited by the players is a substantial change in law and cannot be considered as clarificatory. It creates a new liability, which was never envisaged in the earlier law or its interpretation. It is equally important to note that the interpretation of the government on online gaming was recently rejected by the Karnataka High Court in the Gameskraft case. Of course, an appeal before the Supreme Court has been made.

The GST Council has undermined the discernible differences between ‘games of skill’ and ‘games of chance’, departing from established jurisprudence that was developed over five decades. The investigation arm of the GST department has issued notices to industry players, dating back to July 2017. The potential GST demand, in some cases, exceeds the entire net worth of the company.

India has already had its share of the twisted outcome of retrospective amendment to tax laws, and its impact on the investment climate, thanks to protracted litigation. As recently as 2021, India, in a welcome move, withdrew retrospective amendments to offshore indirect transfers on capital gains, infamously known as the ‘Vodafone tax amendment’. Policymakers had assured that no new retrospective amendments shall be introduced.

It would have been wise to wait for the outcome of the Supreme Court verdict instead of rushing to legislate on it, that too with retrospective effect. An overwhelming desire to collect GST on past transactions has certainly put the economic viability of the gaming business to question, with some of players facing imminent bankruptcy. A rethink to balance the objective of tax collection with nurturing the growing industry is certainly needed.