GST Raise Upsets Apple Cart For Thriving Online Gaming In India

The Goods and Services Tax up till September of 2023 recognised the distinction between the Games of Skill and that of Chance for online gaming. The move to increase GST on skill-based games from 18 to 28 per cent—bringing it at par with the entertainment sector—has left the gaming industry on the brink of collapse. Such is the effect that some of the established companies in this sector are reeling under the repercussions of the move.

The Injury To Online Games Of Skill
Adding insult to injury, this enhancement was not implemented prospectively, allowing the industry to adapt. Instead, the 28 per cent GST rate was applied retroactively from September 2017. Furthermore, the tax was levied on the entire stake amount, including the player's wager, rather than just the platform fee. This interpretation, coupled with the retrospective application, has placed a significant financial burden on the industry. Online gaming companies contend that their primary service is providing a platform, and therefore, only the platform fee should be taxable. They argue that the player's stake constitutes neither a transaction nor income, but rather a pool of funds for distribution to the winner.

The issuance of retrospective tax recovery notices amounting to Rs 1.12 lakh crore to over 40 companies has dealt a severe blow to the online gaming industry. This exorbitant demand, significantly exceeding historical profits, threatens the viability of numerous businesses. Moreover, the 28 per cent GST rate imposed a year ago has severely impacted profitability, with companies experiencing a 20 to 25 per cent decline in margins, pushing many into financial distress.

Steps To Prevent Immediate Injury
To mitigate immediate harm, the online gaming industry has sought legal recourse through judicial intervention. The Supreme Court has consolidated several cases related to the matter, awaiting a final hearing. While the 53rd GST Council introduced Amendment 11(A) and provisions within Section 128 of the GST Act allowing for the waiver of penalties, this provides some breathing room to online gaming companies. However, neither the central nor any state government has yet to utilize these provisions to modify the retrospective effect of the tax recovery notices.

The online gaming industry resorted to getting the notices stayed by the intervention of courts to stop the immediate injury. The Honorable Supreme Court has taken cognizance and pooled all these cases; however, it is still awaiting a hearing. On the other hand, the 53rd GST Council has taken a baby step through amendment 11(A) and subsequent provisioning in section 128 of the GST Act, where the center or the state government by notification waives any penalty. This gives some breathing room to online gaming companies, however, as of date none of the state or even the central government has taken the initiative to modify the notices from retrospective effect.

The Impact On Online Gaming
The inconsistent and unclear regulatory landscape in India is creating a significant disadvantage for the domestic gaming industry. This regulatory void has allowed illegal offshore gaming apps to proliferate, engaging in unfair practices, exploiting consumers, and undermining the growth of the legitimate Indian gaming sector. The lack of regulatory oversight and the difficulty in enforcing laws against entities operating outside the country's jurisdiction pose a serious threat to the development of a responsible and sustainable gaming ecosystem in India. It also severely limits the ability to protect consumers and ensure a safe and responsible gaming environment.

The Fiewin gaming scam, involving the fraudulent appropriation of over Rs 400 crore from users, serves as a stark reminder of the risks associated with unregulated online platforms. Initially presented as a legitimate platform for earning money through games, Fiewin effectively trapped users by restricting fund withdrawals once significant amounts had accumulated. Investigations by the Enforcement Directorate revealed Chinese nationals behind this operation, utilizing digital wallets linked to a global cryptocurrency exchange to launder the stolen funds. The arrest of four individuals involved underscores the urgent need for a clear distinction between legitimate and fraudulent online platforms to ensure consumer safety and transparency.

Whitelisting As A solution
The implementation of a whitelisting mechanism for Indian-registered companies, coupled with a robust code of conduct and strict adherence to all applicable laws, is crucial for fostering a healthy and sustainable online gaming ecosystem. This approach will not only enhance consumer trust and confidence but also create a level playing field for legitimate businesses while deterring illegal offshore operators. The efforts of states like Tamil Nadu in exploring this mechanism can serve as a valuable model for other states to follow in promoting responsible growth within the online gaming sector.

The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023, enacted by the Ministry of Electronics and Information Technology (MeitY), while defining online gaming, introduces the concept of 'permissible' games. However, these rules lack a clear definition to distinguish between games of skill and games of chance, a crucial distinction for the proper application of these regulations.

The absence of clear distinguishing parameters for games of skill and the ensuing regulatory delays are significantly hindering the growth of the Indian online gaming sector. This uncertainty is leading to revenue losses, missed opportunities, and an exodus of talent. Establishing clear parameters, with games of skill falling under central authority and games of chance under state jurisdiction, is crucial. The recent GST enhancements, including the imposition of 28% GST on the entire stake amount and retrospective tax levies, have further exacerbated these challenges, placing the iGaming industry in a precarious position.

The continued delay in issuing clear distinguishing parameters for games of skill is creating uncertainty and hindering the growth of the online gaming sector. This ambiguity has allowed new entrants to operate in a grey area, while established players face uncertainty due to pending legal challenges regarding retrospective tax levies. While the 53rd GST Council empowered the government to waive penalties, the lack of immediate action is exacerbating the situation. The online gaming sector, a vital contributor to India's vision of a 'Viksit Bharat,' requires a supportive and enabling environment. Strengthening this emerging sector is crucial for India's economic growth and development.