GST On Total Consideration Can Undo MeitY’s Efforts To Unlock The Potential Of Online Gaming

There's an interesting concept that illustrates how humans react to new tax rules or taxation in general. This concept is known as the ‘window tax paradox’.

In 1696, England introduced a new tax known as the window tax, which was levied on property owners based on the number of windows in their homes.

The idea behind this tax was that it would be a simple and straightforward way to generate revenue for the government, as the number of windows in a house was assumed to be proportional to the size and value of the property.

However, this seemingly innocuous tax had unintended consequences. Homeowners began to react to the new tax rule by bricking up their windows to reduce the number of taxable windows in their homes.

This led to darker, poorly ventilated living spaces, which contributed to health problems and an overall decline in the well-being of residents.

The tax even gave rise to the phrase ‘daylight robbery’ as the government was effectively ‘robbing’ people of natural light by imposing a tax on windows.

As the negative effects of the window tax became apparent, the government eventually repealed the tax in 1851. This demonstrates how humans can react to new tax rules or taxation in general in unforeseen ways, leading to unintended consequences.

Like the Laffer Curve, the window tax paradox highlights the importance of carefully considering the implications of tax policies and understanding that people will often adapt their behaviour in response to changes in the tax system.

Today, the Indian online gaming industry, projected to burgeon to a whopping $8.5 billion by 2027, is facing a similar conundrum.

Poised to play a pivotal role in India's ambitious goal of becoming a trillion-dollar digital economy by 2026, this sector may soon grapple with the window tax of our times — the goods and services tax (GST) structure.

For about a year now, the industry has been dealing with GST uncertainty. The GST Council had appointed a Group of Ministers (GoM) to deliberate how the industry should be taxed.

Later, some reports suggested that the GoM may recommend a 28 per cent tax on total entry amount most of which is eventually distributed to the winners as opposed to the current 18 per cent on gross gaming revenue (GGR) which is the only revenue that the platform gets.

If implemented, this taxation issue could potentially 'brick up the windows' of this promising industry, obstructing its path to growth and innovation and lead to several unintended consequences including but not limited to consumer harm.

The key rationale behind recommending such a heavy tax was that online gaming was considered akin to betting and gambling and therefore the policy makers believed that it should be taxed in a similar manner. But this has been clarified now.

The Ministry of Electronics and Information Technology (MeitY), in a decisive move, has provided much-needed clarity and legitimacy to the industry.

By distinguishing online gaming from betting and gambling, it has released the industry from the shackles of misconceived association.

It’s a landmark decision, a sigh of relief that has set a precedent for future policy decisions — something that the CBIC must take due note of and not tax unequals equally.

The differentiation is also apparent in the TDS changes made by CBDT in Budget 2023 and the Finance Act 2023. In Budget 2023, the Finance Minister decoupled online gaming from horse racing and lottery and introduced a new section 194 BA for TDS on online gaming.

Under the new section, the Government of India removed the Rs 10,000 threshold for the TDS and levied a 30 per cent TDS on all net winnings from online gaming. This action ensures every rupee flowing through the online gaming ecosystem is taxed, effectively plugging potential revenue leakages from the prize pool.

The TDS rules are particularly significant because they ensure that the government's revenue from the online gaming industry is secured, even before the prize money reaches the winner. This is a smart move that reflects a nuanced understanding of the industry's operational dynamics.

Now, if we juxtapose the new TDS rule with a 28 per cent GST on total entry amount scenario — which comprises GGR and price pool, we will see that the price pool is getting taxed repeatedly — once at 30 per cent through TDS and then at 28 per cent through GST.

So overall the price pool is being taxed at a cumulative 58 per cent. This is more than what the casinos and lottery players pay in terms of taxes.   

Overtaxing the industry in such a manner will undo all the positive steps taken by the government so far and result in a major setback for the industry as well as the users who will most likely move to offshore illegally-run betting platforms in view of the increased costs.

The window tax paradox serves as a reminder that policy-making cannot occur in a vacuum, devoid of its broader impact.

Likewise, the GST Council's decisions must account for the significant strides made by MeitY and other regulatory bodies in distinguishing online skill-based gaming from gambling and betting.

This could also stifle innovation and deter investment in the industry, which has the potential to generate significant employment opportunities.

The industry, which is expected to create direct and indirect employment for around 1.5 million people by 2023, could face stagnation if the proposed tax structure is implemented.

In a country where the digital economy is burgeoning, the online gaming industry can play a significant role in shaping India's digital future.

However, it's crucial that the government's different arms align their views and create a conducive regulatory environment.

A well-thought-out, fair GST structure, coupled with effective regulation, can ensure the industry's growth while safeguarding players' interests.

Instead of viewing it through the gambling lens, the GST Council should recognise the unique nature of the online gaming industry.

It should acknowledge the industry's potential to contribute to the economy and consider its overall impact on society, much like how the abolition of the window tax led to healthier, happier homes.

In conclusion, the window tax paradox underscores the importance of holistic policy-making. The GST council's upcoming meeting provides an opportunity to revisit the proposed tax structure and align it with MeitY's regulations.

A balanced approach will not only 'unbrick the windows' of the online gaming industry but also allow the industry to grow and contribute significantly to India's digital economy.

As the saying goes, "all good things take time", and the online gaming industry has been patiently navigating its path through regulatory ambiguities and taxation paradoxes.

The industry hopes that the upcoming GST Council meeting will mark a new dawn, free from the shadow of the window tax, and usher in an era of rapid growth and prosperity.

The positive developments and consequent clarity in legal status of the industry, will hopefully pave the way for a rational and fair GST framework for the industry in the upcoming GST Council meeting.

It may even be prudent for the GoM to reconvene and relook at the GST on online gaming in light of these developments.