Taxing The Gaming Industry To Death: The Consequences Of 28% GST

In recent years, the skill-based online gaming industry in India has witnessed unprecedented growth, becoming a significant contributor to the country¡¯s digital economy. Currently valued at $2.5 billion, the industry has shown remarkable potential, with projections indicating it may reach a staggering $5 billion by 2025. This remarkable success has attracted substantial investments, with $2.8 billion pouring in from both domestic and global investors over the last five years. The industry¡¯s average compound annual growth rate (CAGR) stands at an impressive 30%.

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However, a cloud of uncertainty looms over this burgeoning sector due to a recent recommendation by the GST Council. The Council's recommendation to levy a 28% Goods and Services Tax (GST) on 'the full face value of the bets placed' on online gaming has sparked concerns among the industry stakeholders. This move, if not reconsidered, could have dire implications, potentially impacting the industry's value, job creation, investor confidence, innovation, and consumer interests. Moreover, the proposed GST mechanism risks creating incentives for illicit offshore gambling operators to thrive, attracting Indian users towards them, and ultimately hindering both optimal tax collection and the legitimate industry's growth.

The online skill gaming industry has been paying 18% GST on the Gross Gaming Revenue (GGR)/ service platform fee or commission charged by online gaming platforms to facilitate a game. This has been the standard practice for the industry for the last 15 years under the erstwhile Service Tax, and the extant GST regime. Similarly, globally, the GST is levied on the amount charged for the provision of service and this can only be on the platform fee or service charge levied by any gaming company.

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Contrary to misinformation, the online skill gaming industry has contributed significantly to GST revenue, amounting to over Rs. 2000 crores. However, if the GST is to be levied on ¡°full value of bets¡± , i.e. on ¡®every contest played every time with fully taxed winnings¡¯, the GST burden will increase by 1,100-1,500% and on account of taxation of redeployed player winnings, the same money will get taxed repeatedly resulting in a scenario where over 50-70% of every rupee will go towards GST, thereby making the online real money skill gaming business model unviable. Thus, the sudden and substantial increase in GST could prove detrimental, leading to a decimation of industry profits and consequently lowering tax revenue for the government.

It is crucial to highlight that MSMEs and small gaming players constitute a significant portion of the industry, and implementing a 28% GST on the 'full face value of bets' poses a grave threat to their survival. This decision would disproportionately benefit larger gaming companies, potentially leading to the downfall of smaller players and the establishment of a monopolistic market dominated by bigger entities. As a consequence, the diversity and competitiveness of the gaming industry could be severely compromised.

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Moreover, the GST decision could inadvertently push the Indian market toward illegal offshore gambling platforms, leading to substantial tax losses for the government. This would also pose potential financial instability as money flows out of the country through unaccounted and clandestine means.

In conclusion, the proposed 28% GST on ¡®full face value of the bets placed¡¯ in skill-based online gaming casts a shadow of uncertainty over a rapidly growing industry. If not re-evaluated, the decision could have severe ramifications, jeopardizing revenue streams, jobs, investor confidence, and India¡¯s standing as a digital gaming powerhouse. It is crucial for policymakers to reconsider the GST rate, seeking a balanced approach that supports industry growth while ensuring consumer protection and revenue generation for the nation. A careful and thoughtful consideration of the industry¡¯s needs is essential to foster innovation, create jobs, and cement India¡¯s position in the global digital gaming market.

The author, Gopal Jain Is a Senior Advocate of the Supreme Court of India. He specialises in commercial disputes, arbitrations and regulatory litigation. The views expressed are author's own.