Of Skill and Chance: 28 Percent GST on Online Gaming is Killing the Industry

Lesser tax may lead to reduced tax collection, but the subsequent growth of the industry can compensate for it.

The recent decision of the 50th GST Council to levy a 28 percent tax on the gross amount involved in online games has raised concerns within the gaming industry and among consumers.

The potential of the online gaming industry has been realised for some time to generate jobs and revenue and also saw significant growth during the pandemic and attracted foreign investment. However, the decision to impose a uniform tax rate on the entire amount pooled in online games is somewhere industry unfriendly and not in line with global practices.

India’s share of the global online gaming industry is currently just 1 percent. In contrast, China has a 25 percent share, and the US a 23 percent share in a market of about three billion users. According to industry estimates, in 2020, the worth of India’s online gaming industry was around $1.8 billion.

With a 38 percent compounded annual growth rate (CAGR), the industry is expected to grow to $5 billion by 2025. There are about 400 million online gamers in India and their numbers are expected to grow to 450 million by 2024.

India’s advantage also lies in the fact that 86 percent of online gaming is mobile gaming and this sector is growing the fastest. According to the industry body, IAMAI, there are about 950 start-ups in the sector with 15,000 developers; three of these start-ups have acquired unicorn status.

Games of Skill and Chance

Clearly, the union government was aware of the broader contours of the industry and its potential to bring in investments and generate jobs. This was clear in its intent to help grow this industry as well as keep the citizens safe when it took the approach of the self-regulatory mechanism when the Ministry of Electronics and IT (MeitY) notified the relevant amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 on 6 April 2023.

The purpose of these amendments was definitely to control the unabated and unwarranted negative impact of online gaming activities on users, especially children and other vulnerable sections of society but at the same time not create impediments for the industry to grow.

Though the government has shown an intent to support the growth of the gaming industry while ensuring user safety through self-regulation, the decision to levy a 28 percent GST on the entire amount pooled in online games has raised concerns among investors. This taxation approach is different from what is practiced in other parts of the world, where GST or VAT is typically levied on the platform fee or service charge imposed by gaming companies.

Traditionally, the law has distinguished between games of skill and games of chance. Games of chance, which rely purely on luck, are considered gambling, and agreements of wager related to them are void. On the other hand, games of skill are not considered gambling, as a player's skill determines their chances of winning.

This distinction has been recognized for over a century, and certain laws have been in force to regulate these activities. Section 30 of the Contract Act, of 1872, states that agreements of wager are void and no one can resort to legal proceedings to recover amounts due from games of chance. On the other hand, section 12 of the Public Gambling Act, 1867 states that a game of skill does not amount to gambling. Unfortunately, the GST council ignored this distinction also its decision and uniformly taxed the online gaming sector.

Jobs, Revenue, and Industry Growth

Much of this can be attributed to the revenue arm of the government that purports to maximise taxes wherever possible. But even before the investments have come and the sector has stabilised, such high levels of taxation on the entire amount have not been a prudent step. Today the estimated annual GST collection from online games is around Rs 2,000 crore, only a fraction of the total annual GST collection in India, which is around Rs 15 lakh crore.

The expectation that the new tax rates would lead to a significant increase in revenue collection is considered unlikely and possibly erroneous. The focus on revenue maximization in the tax system might overlook the importance of promoting and stabilizing revenue and job-generating sectors.

A 28 percent tax on the entire amount pooled in online games could have adverse consequences, leading to potential job losses and the survival of the gaming industry coming under question. It is suggested that policymakers should consider the collateral consequences of imposing high tax rates.

Lower tax rates may result in lower immediate tax collection, but the subsequent growth in the industry and increased employment can compensate for this loss in the long run, positively impacting the overall economy.

There are reports about the next meeting on 2 August this year of the GST Council to touch upon the issue again. Hopefully, it will consider the gaming industry's unique characteristics, such as the distinction between games of skill and games of chance, should be considered when formulating taxation policies.

Policymakers should also take into account the long-term economic implications of taxation and strike a balance between revenue generation and industry growth. This will help in realizing the government’s target of reaching the $ 1 trillion digital economy milestone in a more inclusive way.

(Subimal Bhattacharjee is a commentator on cyber and security issues around Northeast India. He can be reached @subimal on Twitter. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)