Real Money Faces Real Threat: GST Council Puts 28% Tax On Online Gaming

On 11 July 2023, the 50th GST Council reached a conclusion to levy a 28 per cent indirect tax on various activities including online gaming. Headed by Union Minister for Finance Nirmala Sitharaman, the council came to this conclusion stating that this will 'level the playing field'.

While industry leaders are extremely unhappy about the decision, many have went on and described this decision as a 'self-goal' that will 'kill the industry'. Prior to this decision, online gaming was paying a GST of 18 per cent on revenue. They had earlier proposed a GST of 28 per cent on the platform fees (gross gaming revenue or GGR) as opposed to the earlier 18 per cent on GGR.

"We are disappointed that the GST Council and authorities have chosen to apply 28 per cent GST on the total entry amount including prize money," said Joy Bhattacharjya, Director-General, Federation of Indian Fantasy Sports (FIFS). 

"It is in addition to the loss of employment opportunities and the huge impact on marquee investors who are heavily invested in this sunrise sector," stated Malay Kumar Shukla, Secretary, E-Gaming Federation.

What's the big fuss about this decision and why is this decision being frowned upon by the entire online gaming industry? Let's find out.

What's Wrong With The Decision?

The online gaming sector was dealt with a huge blow on 11 July when the 50th GST Council decided to levy 28 per cent on online gaming leaving the sunrise sector in utter disarray.

The council stated that this decision was taken after ‘careful’ consideration and the fact that the sector is collecting ‘very little tax’, further adding that this would level the playing field and promote transparency.

No distinction between online gaming and esports

One of the major controversies surrounding this judgement is the council’s decision to do away with the distinction between games of chance and games of skill, something that gaming companies have been fighting hard to establish. The Esports community has been fighting tooth and nail for getting distinction from real money gaming or gaming as it is known worldwide.

"The decision of the GST council to impose a 28% tax will have a significant impact on the online gaming industry, which unfortunately includes the Esports community. While we understand that the government needs to impose such measures on casinos, horse racing, and gambling, the higher tax rate is not justified for the competitive gaming community," stated Sagar Nair, Co-founder and CEO, Qlan. 

No distinction between games of skill and games of chance

Moreover, games of skill have been clubbed with activities like gambling and horse racing. Activities such as online poker have got judgements in their favour in the past labelling them as 'games of skill'. However, this decision of the GST Council has done away with that differentiation. Industry leaders argue that online gaming cannot be clubbed with casinos because their business models are different.

"Businesses have a legitimate concern that this move will push users towards illegitimate betting and gambling operators that don't follow the laws of the land,” said Siddharth Sharma, SVP- Business Strategy, Head Digital Works (A23).

The argument proposed by industry leaders here is that the apex court of India, along with several High Courts have repeatedly held that In games of skill, a person uses their memory, knowledge and judgment to make an informed decision before putting money at stake. The judiciary has also clarified umpteen number of times that businesses based on games of skill are protected under our Constitution unlike those that are based on games of chance.

Finance Ministry states that GST Laws and MeitY’s IT Rules for online gaming are different

Tax laws can have a powerful unintended regulatory impact and can impact revenue collection. 'With 28 per cent GST levied on the entire deposit of the game, MeitY’s new regulations for the gaming sector will become meaningless,' argued many industry leaders.

'Online gaming industry is collecting very less tax', says GoM

The decision on 11 July came with a statement from Finance Minister Sitharaman stating that online gaming collects very little tax. This was a cause for another controversy as leaders and spokespersons argued that the online gaming industry currently pays approximately INR 2,200 crore in GST to the government.

Areas That Will Be Affected

Value of the online gaming sector

Currently valued at USD 2.5 billion and projected to reach USD 5 billion by 2025. The online gaming industry attracted USD 2.8 Bn from domestic as well as global investors in the last 5 years (a 380 per cent increase from 2019 and a 23 per cent increase from 2020). The industry is growing at an average CAGR of ~30 per cent.

As the industry becomes unviable by the steep rise in GST on deposits, the value of the sector will be decimated. Industry leaders believe that this will lead to -

• potential mass layoffs;
• loss of investor confidence
• the proliferation of offshore gaming sites
• direct assistance to China and its strong gaming industry

Jobs

The online gaming sector currently supports lakhs of direct and indirect jobs and is expected to grow considerably over the next few years. Companies like WinZo have contributed to over 1,00,000 direct and indirect jobs. It has been estimated that gaming will create over 5,00,000 direct and indirect jobs by 2025. However, as per experts and industry leaders, the industry will have to consider massive layoffs in the aftermath of the decision on GST valuation.

Investor sentiment

India’s gaming industry attracted USD 575 million between 2014 and 2020. However, in 2021 and Q1 of 2022 alone, USD 1.7 billion was invested in the Indian online skill gaming sector. Currently, there are three online skill gaming companies which have become unicorns. However, the imposition of this GST rate will discourage potential investors, both domestic and foreign, from considering India as a viable investment
destination.

Offshore gambling companies

There continues to be a diverse set of offshore betting and gambling platforms that offer their services illegally within India. While efforts have been undertaken to identify these platforms and limit their reach in advertising to the Indian populace, these platforms tend to be dynamic in nature and continue to find new ways to offer their services to Indians, By making the operations of the Indian online skill gaming industry unviable, this decision of the GST Council has the potential to drive the Indian market towards black market operators including illegal offshore gambling websites, resulting in substantial tax loss to the government. This will be detrimental to Indian users since such operators will not be accountable or fall under the proposed SRB regime by MeitY.

Recent Developments

The Confederation of All India Traders (CAIT), the apex body for trade federation and associations which represents eight crore traders and over 40,000 trade associations has called on the Prime Minister to intervene, re-evaluate and revoke the decision of the GST Council to levy GST on the full face value for online gaming and clubbing it with gambling activities.

CAIT National President B C Bhartia and Secretary General Praveen Khandelwal stated that the decision is catastrophic for the industry, making it unviable and leading to massive job losses. He further added that the decision is also against the scheme of DigitalIndia and StartUpIndia and there is a need to regulate and grow this booming sector.

A group of players from the skill gaming industry on Friday urged the government to reconsider its approach to GST on online gaming. n a letter addressed to Finance Minister Nirmala Sitharaman, they said, “This decision would increase the entry cost for us to 28 rupees per 100, compared to the previous rate of 1.8, rendering online gaming financially burdensome and entirely unattractive as a source of entertainment or livelihood.

In addition to this, over a hundred representatives of the Indian online gaming sector including entrepreneurs, CEOs and gaming federations have reached out to the Prime Minister of India in an open letter to the Modi government to protect India’s nascent and high growth potential online skill gaming industry. The likes of All India Gaming Federation, E-Gaming Federation, Federation of Indian Fantasy Sports, WinZO, Witzeal Technologies Playerzpot, Nazara Technologies, Yudiz Solutions and Head Digital Works involved in this letter to the administration.

What Awaits the Online Gaming Sector?

The decision is yet to be turned into a law which will probably happen during the monsoon session of the Parliament. If this happens, while the full range of consequences is still speculative, the 28 per cent GST burden on deposits and the prize pool will surely affect the online gaming sector.

The Group of Ministers took this decision stating that they want to level the playing field and promote transparency. Whether or not those goals will be accomplished will have to be seen in the longer run. However, the bigger that is looming over the stakeholders of the online gaming industry is why such an inhospitable decision is being taken by the administration knowing that it will hinder the progress of the sunrise sector of gaming.