Explained: Will 28% GST kill real-money online gaming industry in India?

The government plans to slap a 28 per cent tax on all forms of online gaming to discourage the youth from getting addicted to such practices. Up until now, only online gambling and betting have attracted such a steep tax.

 

Earlier this week, Finance Minister Nirmala Sitharaman announced a 28 per cent GST levy on the total game value for online gaming, horse racing, and casinos, equating skill-based online games (non-gambling games) with online games of chance (gambling games) under India's tax regime. 

 

Current GST regime differentiates between skill-based games and gambling ( based on chance)

 

As of now, the GST regime differentiates online games based on skills versus chance. With the recommendation made at the 50th GST Council meeting, 28 per cent GST will be charged on full face value. 

 

"A game of skill is one where the outcome is dependent on the player's expertise, practice, and experience and not merely on chance. Some examples include rummy and fantasy sports games like Dream 11. This distinction is important as skill games invite a lower tax rate applicability.

 

Whereas games of chance are treated similarly to betting, gambling, and horse racing. Thus, they are subject to Rule 31A of the CGST Rules, 2018, which charges a higher GST rate," explained ClearTax.

 

However, an issue arises as the line between skill and chance can be thin in some cases, as can be gleaned from the recent case of Gameskraft Technology. The tax authorities clubbed together all its games, including rummy, into games of chance, thus inviting a higher GST tax rate.

 

Point to note: GST levy of 28 per cent comes after the government introduced a 30 per cent tax deducted at source (TDS) on net winnings for online games earlier this year.

 

The increased tax rate will result in higher costs for players, as they will have to pay an additional 28 per cent on their gaming expenses, including in-game purchases, subscriptions, and tournament fees.

 

How does the 28 per cent GST work?

 

Currently, online gamers and poker players do not have any impact of GST on the value of bets placed by them or the winnings, except for the platform fee collected by the online gaming company. However, post-implementation of the GST Council's recommendation, there will be a direct hit of 28 per cent to the online gamers and poker players on the face value of each bet placed.

 

This means that 28 per cent GST will be levied on the total pool amount for a game, 30 per cent TDS on net winnings, and the platform will charge its own participation fees.

 

GST is an indirect tax, i.e., a tax on the consumer (receiver of the supply), so the tax burden will typically be passed on to the consumer. "In effect, to place a bet of Rs 100/-, a consumer will have to shell out Rs 128/- (Rs 28/- being the GST) or if the available amount is Rs 100/- the full value of the bet will be Rs 78/- (and the GST is Rs 22/-) if GST is included therein. Notably, either the cost of online gaming will rise (for the consumer) or, if the demand is inelastic, the full value of the bet placed will decline," said Ranjeet Mahtani, Partner, Dhruva Advisors.

 

Onkar Sharma, Partner, Khaitan & Co., explains this with an example: If Rs 100 is the value of a bet placed during a game of Poker, then currently the amount received by the winner is Rs 100 – platform fee of Rs 10 (calculated @10 per cent of the face value of bet inclusive of GST) = Rs 90. Profit made, assuming there were two players with equivalent contributions, is Rs 90 – Rs 50 = Rs 40

 

Net GST Impact – Rs 1.5

 

Post implementation of the recommended 28 per cent on face value, the amount received by the winner is Rs 100 – Rs 28 (28 per cent of Rs 100) – Rs 8.47 (platform fee) = Rs 63.53

 

Profit made = Rs 63.53 – Rs 50 = Rs 13.53; reduction in profit = 66.17 per cent

 

Net GST impact – Rs 28

 

How 28 per cent GST will result in a substantial reduction in player's contribution towards prize money

 

"Hitherto, GST at 18 per cent was levied on the Gross Gaming Revenue (GGR) or the platform fee, which ranges from 5 to 20% of the value of bets placed. For instance, an online gamer or poker player has wagered Rs 100, which includes a Rs 10 platform fee. Thus, a player's contribution towards the prize money would be Rs 90. In this scenario, GST at 18 per cent was levied on the platform fee, namely Rs 10. Now, in light of the GST Council's decision, an upfront GST of 28 per cent would be chargeable on the entire wager amount of Rs 100," said Saket Patawari, Executive Director, Indirect Tax, Nexdigm.

 

This would lead to a substantial reduction in the player's contribution towards the prize money after the deduction of the platform fee. In the above example, the player would now contribute Rs 62 (Rs 100 wager amount less platform fee Rs 10 less 28 per cent GST = Rs 62).

 

"The industry could resort to marginal increment in the bet/wager amounts to factor the 28 per cent GST so as to keep the prize pool more or less untouched. This could drive away the players as they would require to shell out more as compared to the present scenario, keeping in mind that the earnings will be subject to a TDS of 30 per cent as well," said Patawari.

 

28 per cent GST will increase the tax burden for gaming firms by 1100 per cent 

 

According to Dhruv Garg, a technology lawyer and head of the All India Gaming Federation, 28 per cent GST will increase the tax burned on gaming firms by around 1,100 per cent. "The per-game cost for each player will grow threefold. Ultimately, the GST charged will be more than the revenue of many gaming firms," he said.

 

Why users will be disincentivised from playing

 

Since the new tax will apply to the total amount of money deposited by players, the immediate would be that users would notice a reduction in their prize money, which would disincentivise them from playing.

 

"This higher tax burden may impact the companies' cash flows as well as create hindrances on further investments in relation to innovation, research and business expansion. Consequently, this move may have far-reaching effects on employment generation in this fast-growing industry, especially in the start-up space," said Krishan Arora, partner at Grant Thornton Bharat.

 

Users could shift to illegal platforms

 

Council's decision has put the taxability for a game of skill and chance at par, which is likely to result in a shift of users to illegal betting platforms, which would result in higher user risk and loss of revenue for the government, added Arora.

 

"Today, technology has made the business environment global. Any irrational tax could shift the business to a more favourable jurisdiction. As against the logical attempt to stop offshore gaming companies from operating in India, the Council has done exactly the reverse. Now, the domestic gaming companies would shift businesses overseas, and India would lose its legitimate revenue, in addition to the loss of jobs and other economic activities associated with such business," said Kamal Aggarwal, senior partner at Singhania & Co.

 

 Gaming companies up in arms

 

Nearly $2.8 billion has been invested in the gaming industry in India.

 

The All India Gaming Federation (AIGF), which represents companies such as Nazara, Gameskraft, Zupee and Winzo, said the decision by the Council is unconstitutional, irrational, and egregious.

 

"The decision ignores over 60 years of settled legal jurisprudence and lumps online skill gaming with gambling activities. This decision will wipe out the entire Indian gaming industry and lead to lakhs of job losses and the only people benefitting from this will be anti-national illegal offshore platforms," said AIGF CEO Roland Landers.