Taxation on E-Gaming: Challenges, Impact & Solutions in India’s Growing Industry

Taxation on E-gaming

Abstract: the online gaming sector is growing rapidly with the pace of time. A rise in young population, changing social contact needs, and improved accessibility to the internet have all contributed to the nation’s gaming industry’s growth. Obviously, with the increased number of handsets available and better internet accessibility more and more people are getting a deep interest in e-gaming platforms. Not only is it a source of entertainment but also a source of Income in recent times. India is one of the most populous countries with a population of 140 crore people among them 50% of the population is below the age of 25 years and 65% is below the age of 35. With the huge population of youth India has become a hotspot for the biggest market of gaming in the globe. According to the statistic “State of India Gaming Report FY23”  It is expected that the gaming industry in India will have expanded from $3.1 billion in FY23 to $7.5 billion by FY28. It is home to millions of gamers and it is expected to grow with the coming years. However with the new amendments in Income tax act 1961 and the recent commencement of Finance act 2023 the gaming industry faced a severe backfall. It should be noted that the gaming industry is occupied with youths and with youths there comes innovation. Innovation can only grow if the youth is capable of handling the current scenario but it is evident that the heavy taxes on e-gaming is not viable and most of the people are losing interest. With the new finance bill the government is imposing a direct tax of 30 % on the gross or total income of the money or prize pool as well as a  28% GST.  This not only challenges the existing users but also the new users who are willing to participate in the booming industry. It further provokes gamers to use illegal ways or dark web to earn their money as well as many are shifting towards gambling apps as they have better returns. It will lead to tax evasion as most of the players will shift to illegitimate sites which will ultimately cause the loss of  revenue collection by the government. The rapid growth of this industry solely depends upon the attitude of the government and its initiatives. This research paper deals with the  taxation on e-gaming, compares the online gaming sector between Indian and foreign markets. It also focuses on the challenges that might be faced by the gaming sector in India and what are the probable solutions for the following problems. Additionally, it focuses on the platform charges of various e-gaming platforms and determines the jurisdiction for taxation in the online gaming sector.

Introduction: In the 90’s the younger generation used to play games in tv sets using some sort of CD’s later on with the evolution and generalisation of computers most of the youth used to have computer sets at home and if not then people can access through cyber cafes where a number of computers were used to be aligned. Earlier games were installed in the respective computer sets and people used to play only for the entertainment purpose but with the evolution of gaming industries  in the early 2000’s India saw a robust popularity in online gaming with the internet accessibility and demand for virtual reality. Now people have already started to have mobile handsets individually. Most of the men have already started downloading apps through play store and apple store. We as a community did not embrace online gaming but later on when  people started to make revenue through online games and platforms the government also favoured the initiative. India has one of the most expanding market in e-gaming, moreover there are approximately 568 million gamers among whom 25% are paying users.  India has seen steady growth in the online gaming market in recent years due to a number of factors, including its youthful population (many of whom are under 25), rising internet and smartphone usage at affordable prices, and the country’s increasingly complex and captivating game offerings. Venture capital firms and international businesses hoping to capitalise on the enormous potential of the Indian market are also investing in this sector. Although India’s gaming market is growing enormously still the market is considered to be in the formative years as compared to the other huge markets like China and USA. During the lockdown period when the Covid-19 hit the nation we saw an exponential growth in the gaming sector, while people were forced to stay indoors due to health concerns many started to feel suffocated and bored due to the lockdown thus, people started playing games to entertain themselves. Games like PUBG, Call of Duty, Free Fire and Ludo King, became very famous as people not only can entertain themselves but also can communicate with others while playing which gave them a real time experience of playing together, also many started earning money by contesting in various such games organised by some companies. Humans are social creatures thus the games they played helped them to socialise with other people from around the world. The growth of such games attracted millions of people, the government on the other hand started realising that it is a booming sector and we can gain a huge number of tax collection from the sector. Following this the government allocated the matters relating to online gaming to be regulated by the  Ministry of electronics and information technology. On January 2nd 2023 the Ministry of electronics and information technology issued some guidelines and an amendment to regulate online gaming. The government proposed to tax at the rate of 30% on the net income of the user beside taxing at 28% GST on the net winnings.

Various sub-sectors in the gaming industry

There are various sub-sectors in the gaming industry, they are as follows:

1. Casual Games: Casual games come in every genre and type of gameplay. They are typically distinguished from more complex  games by having simple rules and minimal commitment levels. A man does not need to have special skills for such games nor do they require a long time in such games.

2. Real Money Games: Real-money gaming, or RMG, refers to the practice of users playing games for real money with the intention of gaining more than they initially paid. The game operator generates money by charging players a network fee and a fixed commission that is determined by the amount of money each player bets. Real money gaming includes all forms of wagering, such as poker, lotteries, slot machine or casino table games, sports betting, sports wagering, bingo, and fantasy sports.

3. Esports:  Esports is the term for a relatively new kind of spectator entertainment that encompasses all video game genres. Video games performed competitively in a highly organised setting are known as esports. eSports has allowed online gaming to become a spectator sport. Watching video gamers compete against one another instead of a genuine event mimics watching a professional athletic event.

4. Fantasy Sports: Users assemble a virtual team from real-life athletes, and those players are awarded fantasy points according to real-life performance information from matches and offline competitions.The players’ success in the virtual world is dependent on their performance in real life, and their team then plays fantasy sports.

Analysis of taxation on online games before the finance act 2023:

The Finance Act of 1972 Section 14, divides income into five categories: capital gains, income from other sources, profits or gains from company or profession, income from house property, and salaries. Earnings from slot machines, horse races, card games and other games fall under the category of “Income from Other Sources.” The section 115BB of the Act provides that a flat 30%  tax rate of taxation, as opposed to income in the case of individual taxpayers or some other assessees, which are subject to slab rates. Later on in the Finance act of 2010,  it was decided that if the winning is less than 10,000/- then there will be no tax deduction, however if the income exceeds the amount of rupees 10,000/- the person or player has to pay the tax. Thus, if someone wins 15,000/- from playing online games that person will be paying 4,500/- as tax at the rate of 30%. In the same way if a person earns 9000/- then he does not have to pay any tax on the income. The concept of TDS has also been introduced as a method of tax deduction while making payment at the moment of winning such games or lotteries. The idea of Tax Deducted at Source (TDS) was implemented in order to reduce tax evasion and increase tax collection speed. Using this method, a tax deduction is obtained instantaneously upon winning a game or the lottery. TDS aims to eliminate tax evasion and establish a uniform framework for gaming income taxation.

Analysis of taxation on online games after the finance act 2023:

A major change in the taxation of online gaming profits in the post-Finance Act of 2023 is indicated by a new language in the Finance Bill called Section 115 of the BBJ. Instead of using the conventional income slab system, this provision selects a tax structure based on the user’s net income. Instead of applying a fixed 30% tax rate to particular income levels as in the previous framework, the updated framework advises that individuals be taxed on their actual net earnings, offering a more tailored taxation model. In this case, the player’s 1,500/- tax liability would come from the income tax due, which would be computed as 30% of the 5,000/- in net income. Crucially, all net incomes are subject to taxation regardless of size because there are no income slabs. For example, even with a 100/-  net income, the 30% flat tax rate suggests that the amount of income tax due would be 30/-. The Finance Act of 2023 adopts a more nuanced approach by eliminating the need for predetermined income slabs and instead taxes net wins directly. The purpose of this modification is to create a tax structure for online gaming income that is more equal and responsive. Online gamers must comprehend and adapt to this new tax structure, ensuring they are following the most recent legal standards and accurately projecting their tax obligations based on their actual net income from gaming.

Issues:

1. Is it viable to tax so regressively?

2. Will the gaming sector survive under huge taxes?

3. How will the online gaming industry cope up with the mismatched dates of the enforcement of the act?

Facts:

Is it viable to tax so regressively?

Dual taxation is unfairly burdening the gaming industry, according to several investors and creators of gaming apps, and this could have a negative impact on the industry. The proposed taxes, especially the 28% tax rate, are thought to pose a significant challenge to the gambling sector and could have unfavourable consequences, including job losses.

Aaditya Shah, the chief operating officer of IndiaPlays, expressed his concerns and outlined potential repercussions of the higher tax load in a recent interview with The Wire. One of the primary issues raised is the impact on cash flows for businesses; it is anticipated that the higher tax rate will strain financial resources and make it more challenging for gaming companies to operate profitably. Some industry insiders believe that these tax laws could pose a danger to the gaming industry’s viability and growth. Losing one’s profession is especially worrying because a developing gaming industry typically leads to employment chances in a number of jobs, from marketing to game creation.

Remarkably, debates on taxes in any field always revolve around finding a middle ground between financing the state and fostering an environment that promotes company growth. Reaching this balance is crucial to ensuring that tax laws do not inadvertently impede innovation, capital inflow, and job creation in the gaming industry.

Legislators, business representatives, and stakeholders may hold discussions as the possible effects of dual taxation on the gaming sector become more widely known. The two main goals of these discussions are to find ways to meet revenue targets and to create an atmosphere that would support the gaming industry’s sustainable expansion.

Ashneer grover, the founder of Bahartpe app also criticised the government for the new law and said that Internet company creators must get into politics in order for their voices to be heard, which will devastate India’s thriving gaming industry. Since online gaming is a significant industry, Winzo Games co-founder Saumya Singh Rathore has expressed concern that the proposed GST rate may restrict the sector’s potential to expand and strengthen the Indian economy.

Will the gaming sector survive under huge taxes?

In the earlier times there was a minimum threshold of 10,000/- after which the tax was applicable but as now there is no minimum threshold the tax will be applicable even in the smallest transaction i.e, tax will now be applicable even if the winning amount is 1 rupee. This seems very unreasonable for the new players as well as for the ones who are not even lying in the tax bracket. “This is the highest tax rate in the world” , according to one online rummy provider, and it will negatively impact the business. It will affect their capacity to compete and encourage the emergence of unlicensed gambling enterprises. Furthermore, there are worries that this particular tax system may inadvertently encourage the growth of unlicensed and unregulated gambling enterprises. If the tax burden for approved operators gets too high, there’s a possibility that people would utilise unlicensed platforms, which might threaten the integrity of the regulatory framework and put consumers at risk from unregulated gaming.

How will the online gaming industry cope up with the mismatched dates of the enforcement of the act?

Section 194B’s present provisions will stay in effect until March 31, 2023. Only when gaming winnings surpass Rs. 10,000 is tax withheld. The tax deduction threshold will change as a result of the implementation of Section 194B regulations, which will take effect on April 1, 2023, and end on June 30, 2023. In the event that the total earnings during the wager above Rs. 10,000, tax withholding will happen. On July 1, 2023, the provisions of Section 194BA will become operative, and tax withholding from net wins will take place in line with the previously added clause. In order to comply with the change in the applicable tax structure, the online gaming business will have to pay more, twice in a three-month period to execute technological enhancements. The winners declared by OGIs and the users’ actual taxable winnings could differ if two different tax deduction schemes are used in the same fiscal year.

Future projections on increasing tax:

1. Consumer Prices: If taxes increase the price of gaming products (hardware, software, and in-game purchases), then consumers may pay a higher price. This can lead to a decrease in consumer expenditure on games and related goods.

2. Industry Dynamics: The gaming industry is recognised for its intense competitiveness. The market dynamics and customer choices of a specific industry segment, such as console, mobile, or PC gaming, may be affected by taxes that disproportionately affect them.

3. Production costs: Developing a game is an expensive process, and most companies don’t have a lot of money. Raising tax rates could have a negative impact on the amount and calibre of games produced because less funding would be available for game development.

4. Innovation and Investments: High taxation in the gambling industry may deter innovation and investment in state-of-the-art technologies. This could hinder the industry’s expansion and lower its degree of global competitiveness.

5. Employment Creation: Those in related professions like designers, marketers, and game developers can find plenty of work in the gaming sector. Overtaxation may negatively impact the profitability of gaming enterprises, leading to employment losses and a slowdown in the sector’s growth.

6. Black Market: Due to high taxes, some consumers may turn to piracy or purchasing video games on the black market as alternative, potentially illegal means of obtaining them. This may have an adverse effect on the legal industry and the revenue streams of reputable casinos.

7. Global Competition: The gaming industry is a global industry that attracts companies and gamers from a wide range of countries. Companies that operate in areas with high tax rates may find themselves at a competitive disadvantage and choose to move or focus on countries with more favourable tax structures.

8. Adaptation and Diversification: In reaction to high taxes, gaming companies may change their business plans or expand their sources of income. They might, for instance, prioritise in-game commercials, subscription services, or other unconventional revenue sources.

Probable solutions:

The policymakers should stabilise the tax rates and differentiate games based on their categories. A casual game or real time money game should be differentiated from Fantasy sports and gambling apps that promote them as online games. A different tax rate should be applied to different categories based on their intention. A normal taxable limit should be there and TDS should not be on the net winnings of a person.

1. Equitable Treatment and Fairness: It is simpler to distinguish between skill-based, casual, and games linked to gambling or real money transactions when games are arranged according to their category. This allows for the application of a more equitable tax treatment based on the characteristics and objectives of each group.

2. Encouraging Creativity and Skill-Based Games: If tax rates on casual and skill-based games are reduced, developers might be incentivized to create more innovative and skill-based gaming experiences. Promotions for games that rely on more than just chance or luck may therefore be granted.

3. Consumer Protection: By keeping real-money and gambling-related games separate and governed differently, legislators can enhance consumer protection. Tax laws and regulatory systems can be matched to ensure ethical gaming.

4. The Sector’s Development: Tax rates that are stable foster a more predictable business climate for the gambling sector, which in turn draws capital and spurs expansion. For long-term planning and development in the game industry, this consistency can be quite advantageous.

5. Reduced Tax Evasion: Because tax rates are tailored to the particular characteristics and objectives of each game group, a well-differentiated tax system reduces the likelihood of tax evasion or avoidance.

6. Transparent Taxation: Clearly defined tax rates for different categories would make it simpler for gaming enterprises to understand and fulfil their tax obligations. It also simplifies the process of managing taxes.

7. Encouraging Adherence: A just and well-thought-out tax system has a higher chance of being accepted and followed by the gaming industry. This might lead to higher levels of voluntary compliance, which would reduce the need for strict enforcement measures.

8. Social Accountability: Policymakers can connect taxation with wider social aims, such as encouraging responsible gaming habits and minimising possible harm associated with specific game kinds, by enacting tax regulations that discriminate between different forms of games.

Conclusion: The Indian online gaming industry has immense potential, but in order for it to be realised, the federal and state governments need to give substantial support. Make calculated changes to propel the sector to the global forefront. A transparent and unambiguous regulatory framework that distinguishes between games of skill and chance is necessary to boost investor and player confidence. Equally crucial are tax policies that balance revenue generation and industry expansion; models such as Gross Gaming Revenue (GGR) taxes must be considered to ensure continued competitiveness. In order to ensure that gaming is faultless, the government needs to invest in digital infrastructure that boosts connectivity. The abilities and inventiveness of Indian gaming professionals would be enhanced by initiatives for skill development and collaboration with overseas colleagues. Ensuring a safe gaming environment necessitates robust legislation, consumer protection measures, and awareness campaigns. Accepting innovation, connecting with industry stakeholders, and recognising esports as a real sport are further components to success. By addressing these issues, the government can establish the structure needed for the Indian online gaming industry to expand globally. Special status has been granted to the gaming industry in recognition of its unique attributes and potential for economic contribution. A special status could come with personalised awards, accelerated clearance processes, or other benefits that encourage growth. Moreover, promoting accessibility and diversity in the sector could lead to a livelier and more representative market. Taken together, these strategic measures could create an environment that is favourable to the gaming industry. They not only support the industry’s economic growth but also innovation, job creation, and the overall development of a vibrant and competitive gaming ecosystem. Policies pertaining to taxation, regulatory assistance, special status designation, and inclusion taken as a whole can set up the gaming sector for long-term prosperity. According to the analysis, high taxes would gradually push legal players to use illicit offshore gaming applications, cut into the earnings of licensed gaming firms, and ultimately lead to lower government revenue from direct and indirect taxes. On the other side, a tax system that benefits the industry would benefit all stakeholders. The GGR tax structure appears to maintain the industry’s viability, based on empirical evidence from nations where the sector has prospered. One could easily claim that all financial transactions in an online real money game will be subject to taxation given the upcoming changes to the TDS system. Therefore, the sole rationale for applying GST to the entire face value. Since most industrialised economies in the world impose taxes on gross gaming income (GGR), such a move would represent a significant departure from the current legal protections granted to games of skill and set India apart from the rest of the world.