In what can prove to be a huge blow for the online gaming industry, the Group of Ministers (GoM) tasked with making recommendations for the taxation regime is likely to recommend a uniform GST levy of 28 per cent on online gaming irrespective of whether it is a game of skill or game of chance. While according to many reports, the GoM could not reach a consensus, this high tax may also be proposed to be levied on the total consideration value rather than just the Gross Gaming Revenue or the GGR. This can have far reaching implications not just for the industry but also the users and the Government itself.
On any online skill gaming platform, the contest entry amount comprises of two elements – i) the platform fee for participation or the Gross Gaming Revenue (GGR) and ii) the prize pool, which forms the amount of total winnings to be disbursed to participants after tax deductions, which is usually put in an escrow or trust account. The recommendation of levying GST at 28% on total consideration could be a huge deterrent for the industry. In fact it poses the threat of making these businesses unviable with tax payouts potentially climbing by as much as 2000%, as compared to the current amounts. The increase in tax rates would also likely lead to a decline in customers as the prize pool would dwindle and contests would become more expensive for consumers.
In fact, taxation on total consideration would have a negative impact on most stakeholders. Let us understand how:
● Industry: With revenues taking a severe hit, the industry will have to put a halt on its expansion plans. The industry will also become less attractive for the investors limiting the FDI flow into the sector which has so far attracted USD 2.7 Billion in FDI.
● Users: With the decline of legitimate online skill gaming platforms, users may turn to illegal offshore operators outside the regulatory realm, without any financial security or grievance redressal mechanism.
● Exchequer: According to a report by BCG and Sequoia India, the online gaming industry annual revenue is currently projected to grow to USD 5.4 billion by 2025. Taxation on the total consideration would have a crippling effect on this sunrise sector. This would affect the exchequer that is currently bolstered by the revenue generated by the industry. As offshore operators are not governed by the taxation regime, this would be a sizable loss to the economy as a whole.
Globally, several economies have adopted a lower rate of taxation levied on the GGR and have gained from the growth of the sector. As per the Assocham EY report on “GST on ONLINE SKILL-BASED GAMING”, at present, the industry is contributing more than INR 2,200 crores of GST in 2022. Apart from GST, winnings from the online games are taxable at 30% as per Income Tax laws in India. Therefore, industry is contributing a significant amount to exchequer.
International best practices must therefore be considered by the GoM before arriving at the final tax framework for the online gaming industry. Globally, only the GGR is taxed at 15-20%, which creates a favourable environment for the industry and its ecosystem to grow while protecting the interest of the customers.