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Tax regulators should work with industry stakeholders to ensure the taxation model works to support the industry and promote ease of doing business in India.

The decision regarding the implementation of Goods and Services Tax (GST) on online gaming in India is still pending, with the GST Council scheduled to convene for its 50th Council Meeting on July 11. Presently, the online gaming sector is subjected to an 18% GST on Gross Gaming Revenue (GGR) or the platform fee charged by online gaming platforms. This taxation practice aligns with the approach followed in most major economies worldwide, where taxes are levied on the revenue generated by gaming companies.

In America, for example, the revenue from online gaming is taxed differently across the different states, most commonly at around 10% of GGR. The UK has evolved its taxation of gaming and gambling significantly to promote consumer interest and domestic service providers. While players’ winnings from gaming are completely tax-free, the operators pay a variable tax starting at 15% of Gross Gaming Revenue (GGR). To ensure the domestic industry thrives, the same 15% tax on GGR is applicable for any platforms providing services to British citizens, irrespective of where the operators are based.

The situation in the EU is slightly more complicated, but the tax rate for revenue is broadly at 15-20%. Most countries with a thriving gaming ecosystem fall within this range with relatively few outliers like Germany where the tax is as high as 90% but once again the valuation is on the GGR and not on the Contest Entry Amount (CEA). The CEA refers to the entire amount deposited by the players, of which GGR is a significantly small percentage.

GST Council’s interim proposal

During the 47th meeting of the GST Council, an interim proposal was put forth suggesting an increase in GST on online gaming to 28% and a shift in the taxable base from GGR to Contest Entry Amount (CEA). However, due to concerns raised by some council members, the matter was referred to a Group of Ministers (GoM) for further deliberation and recommendations. Although the GoM submitted its report in December 2022, the final decision by the GST Council is still pending.

If the taxation is revised to apply to the Contest Entry Amount (CEA), it would severely impact legitimate businesses operating in the industry, stifling potential sector growth. The change in valuation would result in a tax burden increase of over 1000% for online gaming platforms. Moreover, taxing the CEA would go beyond the operator’s revenue stream. The industry advocates for an optimal 18% GST on earnings (GGR) rather than the entire player deposit amount. Imposing GST on CEA would render legitimate online gaming businesses financially unviable in their current form, forcing them to pass on the increased tax burden to consumers. This, in turn, would drive users towards offshore and illegal platforms that evade taxes.

These proposed changes contradict the government’s efforts to promote a healthy domestic online gaming sector, as evidenced by the Ministry of Electronics and Information Technology’s (MeitY) online gaming rules and the amendments to the Income Tax Act under the Finance Bill 2023. These initiatives acknowledge online gaming as a unique, technology-driven form of entertainment.

Precedents to taxing online gaming

It is also worth noting legal precedents in similar cases. Last September, gaming startup GamesKraft received a notice from the Directorate General of GST Intelligence (DGGI) regarding a tax liability of Rs 21,000 crore. The industry as a whole has been accused of tax evasion amounting to Rs 23,000 crore, which exceeds the total revenue generated by the industry itself. Consequently, various gaming companies and industry federations have resorted to legal action. In response to writ petitions filed, the Karnataka High Court dismissed the Rs 21,000 crore show-cause notice issued by the DGGI.

Similarly, the Rajasthan High Court stayed a notice from the DGGI to Jaipur-based gaming startup MyTeam11, which claimed that the games offered by MyTeam11 were games of chance rather than skill. The DGGI argued that this categorization led to misrepresentation and evasion of appropriate taxes. The court, citing previous cases including a 2019 case, said that, “the issue is no longer res-integra and as such gaming services are not in the nature of betting/gambling.” Additionally, the court concluded that the games offered by MyTeam11 involved skill rather than chance. The court expressed that the issuance of the show-cause notice was an abuse of the legal process, especially since the matter had already been settled by various courts.

The GST Council must keep all these in consideration and ensure that their discussions and decisions don’t stifle the promotion of a healthy domestic online gaming sector, which has been the focus of the central government. More importantly, instability and indecision in taxation structures often create an unsteady ground for investments and innovation as was evidenced when several significant investors highlighted their concerns to FinMin when the interim proposal was brought forward. Frequent shifts in taxation policies have consistently proven counterproductive to business like in the case of the direct selling industry which effectively crumbled under confusion on taxation.

Given that the elections are around the corner, any changes to the existing structure should be considered in the new regime with adequate consultations and a more comprehensive view of how the gaming industry reacts to the recent positive developments in the regulatory space. Even then it would be more fruitful for tax regulators to work with the industry stakeholders to ensure the taxation model works in a way that supports the industry’s growth and sustainability, with a focus on the government’s agenda of improving ‘ease of doing business’ standards in the country.