GST Council’s Decision On Excessive Taxing For Online Gaming Is Counterintuitive

India witnessed significant growth in online gaming with 15 billion game downloads (the highest globally), reaching 50 crore gamers in FY 2021-22 compared to 45 crore in FY 2020-21.

Currently, there are about 900 gaming companies in India offering various formats of online gaming.

The gaming industry's contribution to the exchequer also increased to Rs 2,000 crore in FY 2020-21 and may double by 2025.

In a recent GST Council meeting, it was decided to end the distinction between skill-based gaming, such as online gaming, and chance-based gaming like casinos.

The GST rate on online gaming operators was raised from 18 per cent on Gross Gaming Revenue (GGR) or platform fee to 28 per cent on Contest Entry Amount (CEA), which is the full value of bets placed.

This increase in tax burden creates a dual problem of offshore and illegal gaming.

The change in taxation could heavily impact the investments the sector has received so far and potential future investments, making the online gaming business less lucrative.

This may lead to fewer platforms entering the sector, severely impacting innovation.

Additionally, it will discourage players from accessing legitimate gaming platforms that follow the law and pay taxes, leading to the proliferation of offshore and illegal gaming platforms and reducing revenue generation for the exchequer.

Recently, the Enforcement Directorate (ED) conducted a crackdown on foreign-registered online gaming companies suspected of laundering over Rs 4,000 crore.

These companies operate through various means of financial transactions, including hawalas, dark web transactions, cryptocurrencies, and others, evading monitored financial networks.

Only in the recent past have there been progressive regulations by the central government for the wholesome promotion of the online gaming sector.

Furthermore, in an attempt to clarify and streamline the applicability of the tax deducted at source (TDS) and taxation of winnings from online games, the government, in the recently announced 2023 Budget, proposed a 30 per cent tax on the "net winnings" from online games.

The government also proposed the removal of the minimum threshold limit of Rs 10,000 for calculating the TDS.

Interestingly, the finance minister also mentioned the distinction between "games of skill" and "games of chance" in the Finance Bill when she signaled that both might get a separate tax structure in the future.

The Ministry of Electronics and Information Technology, which is the nodal ministry overseeing the online gaming sector, has also worked expeditiously to notify rules for online gaming in a bid to bring more regulatory clarity to the sector.

Much of this progress will come to a standstill with the GST Council’s decision to tax the online gaming industry at the same level as gambling, with a sin tax of 28 per cent, rather than a more rational 18 per cent which is levied on the entertainment industry.

Globally, the gaming industry is bigger than Hollywood and the music industry put together. In India too, the gaming industry has been witnessing significant growth and has seen as a significant part of the media and entertainment sectors.

The huge taxation on online gaming hinders the growth of domestic online innovation, which in turn makes India dependent on online gaming platforms of other countries. It is impossible to seclude India from offshore gaming platforms, and hence this is a double whammy for India.

If the government is concerned about gamers becoming addicted to online games, restrictions on how much an individual gamer may play can be put in place based on their financial position. With the PAN card linked to the profile of the gamer, it is not difficult to dictate how much each gamer can play based on their individual financial capacity.

By regulating the online game, the government can permit online gaming with reasonable taxation and ensure that individuals don’t lose beyond their financial means. Let pragmatism decide the policy paradigm of online gaming.