Introduction
With the Goods and Service Tax (GST) being applicable on both ‘luck’ and ‘skill’ based games from October, the Government has certainly opened a new door towards taxation and regulation in the nascent sector. This sector experienced a surge in users over the past few years, leading to the government bringing out a revision in the ambit of the GST aimed at including such games under its purview. Since 1 October 2023, the bets placed in casinos and horse racing, and online gaming are under a 28% uniform GST rate. The move was justified to streamline revenue and bring more and more sectors under the taxation regime.
While it sparked diverse reactions from state governments and industry leaders, it is not entirely surprising. In the past, several State governments have often differed in their responses from the Centre over the online gaming industry. A notable example was Tamil Nadu’s ban on online gaming in 2022, after a four member committee led by Justice Chandru recommended an executive order ordering a ban on online gaming. However, it is not completely correct to blame the government for such an approach towards a concept involving losses and profit. The perception of such games and gambling as a ‘demerit’ good in the prevailing social morality has not changed over time especially in an Indian context where social values and public religion have often discouraged gambling as a vice.
Governments, too, had good reasons to discourage online gaming due to its potential to create gambling addiction, especially among young people. This addiction can lead to financial troubles, criminal activities, and even suicide, making regulation a public health priority. For instance, the deaths of more than 41 people in Tamil Nadu due to gambling addiction, caused public outrage and a call for action against gambling by the media. Furthermore, the passing of the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2022 shows that public health is important in such considerations.
With this sector now under the taxation regime, it is argued that it comes at the cost of the decay in the industry. A uniform rate on all companies – large and small – would create an uneven competition field, leading to little growth of small and medium-sized enterprises and ultimately slower overall development. This piece analyses the effects of this tax on the gaming economy of India.
Page Contents
Online Gaming and Market Effects
While the uniform rate is adjusted at 28%, the tax incurred on the winners of a game is 30%. This immediately reduces the winnings’ margins of the gamers. With most gamers present in the 18-30 age bracket (Millennials and Gen Z) and nearly 64% of them making regular in- app purchases to progress, these purchases amount to a significant percentage of earnings for game developers , nearly 48.2% for mobile game developers. Owing to mobile games’ easy accessibility and popularity, the demand for in-app purchases is usually elastic at lower levels of income and inelastic at higher levels of income. This is due to an increase in the price that is responded to differently by different types of consumers.
The 28% GST on the annual earnings would have a substantial impact on the revenue of developers; it is reasonable to expect developers to increase the prices of in-game purchases. Such an increase would most definitely reduce the total amount of in-game purchases made by gamers, leading to lower revenue of the developers. Many developers might also choose to accept fewer revenues and go on selling in-app purchases at the same price, but this course of action would not guarantee the developer’s long-term competitiveness.
Another possible reaction is the restructuring of online games in such a sense that it becomes more than necessary to buy in-app purchases to continue playing meaningfully in a free-to-play game. This strategy can label a game as “pay-to-win” (P2W), making it unattractive to most players who avoid games that require in-app purchases, shrinking its player base and competitiveness. Reduced purchasing power among younger generations, the primary player base, nudges the consumer base toward those less concerned with prices, resulting in fewer users on these platforms.
This impacts the industry’s growth and limits its contributions to the economy and job opportunities. Such a move can be fatal, since India is touted to be the fastest growing video game market in the world, growing at a 5-year CAGR of 17.2%, forecasted to reach $1.6 billion by 2027.
Mr Joyjyoti Misra, Group General Counsel of Gameskraft, opines that the industry can not sustain at this tax rate. and that since in the long run many more companies and startups would be much more profitable, it is in the governments’ as well as the markets’ interest to defer the imposition of such a tax to a later date. Such a consideration might be worthwhile as removing factors which may impede the growth and development of the gaming industry would be important in ensuring the same.
Online Gambling and Foreign Investment
Another impact is that it fails to create a suitable environment which would aid in bringing in Foreign Direct Investment (FDI) in the online gaming industry. In India, gaming is governed by the State Governments. Brick and mortar establishments, in the form of casinos, are few and heavily regulated. As a result, gamblers who can’t access casinos shift to online platforms for gambling, leading to an increased demand for online casinos.
An increased demand makes the prospects of shifting operations attractive. However, this policy spells a different perspective for investors. Such a move signals that any new market player would have to go through a heavy tax on earnings. Attractive profits in the short-to-medium run seem bleak as a lot of revenue is caught up in taxes. It portrays the host country as investor-unfriendly and motivates companies to shift operations overseas, thereby disincentivizing FDI.
Legal Ambiguity
Notably, a confusion regarding the position of law also emerges. For instance, the Public Gambling Act of 1867 does not define ‘online gambling’ and ‘real money gaming’. Gaussian Networks Pvt. Ltd. v. Monica Lakhanpal and State of NCT is the only case law to touch on the subject of online gaming. Legal definitions in case laws for the purposes of taxation are outdated in the online context. Many state governments have already outlawed online gambling and the legal literature on the subject matter available is scarce.
Another concern is that the GST does not discriminate between games of skill and games of chance. The distinction between the two was recognised in various judicial precedents and in Dr KR Lakshmanan v State of Tamil Nadu 1996 AIR 1153, 1996 SCC (2) 226 , the Supreme Court held that games where the element of skill predominated over the element of chance would be recognised as games of skill. The new policy disregards the precedent stated above and taxes these types of games in the same way as it taxes games of chance.
Prominent voices in the industry have also raised concerns as eSports Players Welfare Association (EPWA) director and Tech Policy lawyer Shivani Jha states:
“We hope that the council of ministers will take equitable steps to ensure an increased GST doesn’t discourage players from playing altogether. Gamers must not be taxed the same way as Gamblers”.
The open-ended term ‘online gaming’ also puts companies in a dilemma over the question of whether or not each of their services will be taxed by the government. Such ambiguity increases the probability of companies shifting business to other nations, which have clearer guidelines and jurisprudence on taxation of online gaming.
International Perspective on Taxation
A comparison with other countries’ policies and taxation rates also shows that it places India at an international disadvantage. The United Kingdom taxation policy stands as a case study as it follows a progressive tax starting on 5% for the first $3.5 million earned, going up to 50% for amounts over $17.8 million. It is worth noting that there is no tax to be paid on the winnings obtained from gambling.
Furthermore, the total number of taxes and duties imposed on gambling and gaming are low whereas the collections are not at all low. On the contrary, collections amounted to £2.9 billion in gaming-related duty in the 2017-18 fiscal year. This has been possible due to a thriving gambling industry, encouraged by supportive government policy and a lack of perception of gambling as a malady in society. It also shows that a taxation policy with a relatively lower rate on a strong going market can yield higher tax dividends, ensuring a sustainable market as well as a high inflow of tax revenue.
The European Union, in contrast, taxes 15% to 20% on winnings. Countries such as Belgium, Denmark, Sweden and Germany which use rake fees for taxation, have lower rates of 11%, 20%, 18%, and 19% respectively.
Double Taxation
Currently, online gaming companies have to pay a Tax Deducted at Source (TDS) of 30% on the net winnings. An additional 28% GST amounts to nearly 44% revenue of the companies recorded in collections thus increasing the total tax responsibility and leading to overall lower revenue. An article on IndiaCorpLaw also highlights the same stating that,
“TDS is now applicable at a rate of 30% on net winnings or the prize pool, and GST is also applicable at 28%, on the gaming industry. This creates the issue of dual taxation, placing an unfair burden on the emerging gaming industry in the country’’.
Since a fair percentage of revenue would certainly be lost in taxes, it relays back to the earlier mentioned point about a lack of incentive to enter the Indian gaming industry.
Motions
A method which could be worked out by the GST Council while reconsidering the decision might be consulting with various stakeholders and All-India bodies in an expert committee. Such a committee may include a representation of market leaders and government executives, and involve rolling out GST on a commonly agreed rate, subject to yearly revision as per the decision of the committee.
Another method could be in the form of a progressive tax following on the proceeds of yearly income, like the United Kingdom. Such a move may possibly balance new players in the industry with well-established giants, ensuring fairness in the competition. Reconsideration detailing the regulation to avoid ambiguities regarding double taxation would also be welcomed.
Such measures are expected to balance the interests of the government concerning revenue collection alongside safeguarding the growth of the industries as well.
Conclusion
This piece presents a critical viewpoint on the tax as well as the main points supporting the need to reevaluate the GST’s implementation in light of its consequences. Hurdles in the form of taxation policies and a lack of jurisprudence have also been highlighted as key domestic factors which may impede the growth of the respective sectors. An international comparison on the same subject matter has been provided to compare the Indian situation with various other countries. Finally, suggestions have been provided to ably harmonise the interests of all parties concerned. In conclusion, it should go without saying that the industry would benefit greatly from a review of the GST in light of these implications.
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