The Siren Call of GST Evasion in Online Gambling
If there was a hike in the price of the coffee at your local shop, it is more than likely that you would go elsewhere to get your daily caffeine for the same price rather than quit drinking coffee altogether. A parallel can be drawn for another addiction – gambling.
Online money gaming refers to a player placing an amount in an online game with the expectation of winning an amount. In the Goods and Service Tax Council’s 50th meeting, the decision to levy a 28% tax was imposed on casinos, online money gaming, and horse racing. Nirmala Sitharaman asserts that the primary objective is taxation; however, this measure also carries the underlying moral advantage of discouraging these activities.
A steep tax on online gambling and betting may prove counterproductive. The annual predicted growth rate for online gambling in India is 29% over the next five years. Utilising online platforms that are not government-regulated to evade the payment of GST may be on the rise. In the current scenario, there is a notable trend in online betting migrating to offshore platforms, prompting government initiatives to combat GST evasion. This shift bears a resemblance to the situation with cryptocurrency, where there is a relocation of its operational base rather than a reduction in activity.
The Problem of a Shift in Medium
Offshore online entities that provide services in India are required, as per the law of GST, to register themselves as a supplier of OIDAR. This brings them under the taxable ambit of India, meaning that the face value of bets will be taxed, regardless of a win or a loss. Taxing the entry fee will result in a smaller pool size, shrinking the number of players and resulting in fewer net winnings.
This move, which brings about players losing their money faster, may cause legitimate players to participate in illegal online offshore betting sites to get more value for their bets. To take advantage of the Indian market, many overseas online gaming companies have applications on the Play Store and App Store. Additionally, advertisements for this easily accessible option are circulated.
Discreetly, bookmakers have been tasked with placing amounts online on behalf of the person betting. This version of online betting has yet to be addressed explicitly but does factor into the tax evasion quotient if the bookmaker uses offshore sites not registered under GST.
Ultimately, this would result in a two-fold tax loss to the government. On the one hand, the tax loss results from migration to offshore online sites, reducing the number of players in the domestic and offshore sites registered under GST within the taxable bounds. On the other hand, the unrealised tax that could have been collected without the amendment which incited players to shift their activity medium. Before the amendment, the gross gaming revenue (GGR), the total number of bets minus the total number of wins, was collected. Taxing the face value of bets placed immense pressure on players, resulting in the urge to evade GST.
The Efficacy of Government Measures
In response to the actions taken by the offshore companies regarding advertisements and providing their unregistered services, some of the anticipated measures taken by the government have been actualised, and some are yet to be materialised.
The Centre had directed Google to prevent displaying advertisements from certain sizeable betting platforms such as 1xBet and Betway in the previous year. The Ministry of Information and Broadcasting further instructed OTT platforms, digital news publishers and private news channels to discontinue publicising surrogate advertisements for online betting. This especially includes offshore betting platforms, as repetitive viewing of this nature may tempt a novice to step foot into the activity or, for an existing player, to convert to a site which benefits him more.
Concerning the unregistered online offshore betting sites, GST authorities have requested that the Ministry of Electronics and Information Technology block the offshore sites that fall short of registering themselves. This, however, may prove to be a long process, as the advertised unregistered offshore websites and apps that can be effortlessly accessed from our phones exceed hundreds.
The efforts to block the entry of such offshore companies online may be in vain for two major reasons. First, the domain names of the applications can be easily changed, meaning that their removal will not be permanent. Second, looking into the record of the companies’ accounts may not be fully attainable, as companies of this nature looking to avoid tax wire the money through cryptocurrency, after which tracking becomes futile. An example of such a case is a Cyprus-based company, ‘Parimatch’, which entailed the alleged GST evasion of 20 crore rupees by routing 700 crore rupees via cryptocurrency.
Cryptocurrency – The Parallel Plight
The short-term effects of the amendment have already demonstrated unfavourable action from both the players and the offshore suppliers. The repercussions of these tax policies are eerily reminiscent of the imposition of a 30% tax on income from virtual assets, namely, cryptocurrency, as both industries grapple with the unintended consequences of stringent taxation.
Between February and October 2022, changes in tax legislation led to an exodus of crypto trade volume worth at least Rs 32,000 crore from Indian crypto exchanges to foreign shores. The crux lies in the 30% tax on gains and a 1% deduction on crypto transactions, rendering the Indian crypto landscape less appealing to investors, forcing them to consider illegitimate options. Hence, the common thread between cryptocurrency and gambling is tax evasion.
As Indian cryptocurrency exchanges lost up to 81% of their trading volume between July and October 2022, many users sought refuge in unregulated foreign exchanges. These offshore platforms, such as KuCoin and Gate, provide a haven for traders by not requiring Know Your Customer (KYC) details and operating outside the purview of Indian tax laws. Likewise, offshore online betting sites have lured Indian players with their unregulated nature and enticing advertisements, evading GST.
The stringent taxation policies in both these domains have had unintended consequences. Rather than discouraging participation in these activities, they have pushed users towards unregulated platforms where they can easily evade taxes. This shift poses a risk to investors and creates significant challenges for regulators attempting to curb illicit activities.
Much like a café that raises the price of its coffee, expecting caffeine lovers to abandon their habit – the collection of steep taxes from players’ pastime is likely to rack up negative effects than deter these enthusiasts from their pursuits. After all, gambling is an addiction, and striking a balance between levying GST and fostering a regulated environment, leaving little to no room for evasion, is yet to be achieved.
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Very informative, thanks