Lessons From Kenya: Why Tax On Bet Value Never Works And Invariably Has To Be Rolled Back

The two-day-long 47th Goods and Services Tax Council (GST Council) meeting concluded earlier this week with several compliance-based changes in rules and rationalisation of rates on several goods and services.

However, one key item on the agenda on which no conclusion could be reached was on the valuation on which online gaming, casinos, and race courses would be taxed.

The GST Council, based on representations by Mauvin Godinho, Goa Transport and Industries Minister (and the state’s representative in the GST Council), referred the recommendations of the Group of Ministers (GoM) on online gaming, casinos, and race courses for reconsideration.

According to Union Finance Minister Nirmala Sitharaman’s remarks in the post-meeting press briefing, the GoM on online gaming, casinos, and race courses headed by Meghalaya Chief Minister Conrad K Sangma has been asked to reconsider its recommendations and submit a revised report by 15 July, which is to be considered and decided upon by the GST Council in its next meeting in Madurai in the first week of August.

The current recommendations of the GoM include imposing a 28 per cent GST on the full value of consideration, including contest entry fee; taxing casino entry fee; and the initial purchase of chips in a casino at 28 per cent and a rate of 28 per cent on the full value of bets pooled in totalisators and placed with bookmakers.

In an earlier piece, this writer had argued how this proposal to subject the entry fee or bet value to taxation is absurd and is akin to taxing the entire trade value in a stock market transaction instead of just the brokerage. Seen in this light, the GST Council’s decision to send back the GoM’s report for reconsideration, especially on the narrow point of the manner of valuing online gaming, casino, and horse racing services is a welcome step.

Global Comparison Of Taxation On Gaming

If one were to look at other countries where gaming and betting services are charged, almost all countries collect tax on gross gaming revenue (GGR); that is, the difference between the amount wagered or bet and the amount distributed as prizes.

In a nutshell, the GGR is the commission or margin retained by the gaming house or operator and is essentially the company’s earnings on which tax should be charged.

One would struggle to find examples anywhere in the world where tax is imposed on the bet or face value. If one looks at international best practices of taxation on gaming, the United Kingdom (UK), for instance, imposes a 21 per cent tax on the GGR (margin or commission retained by the company) for online gaming and 15-50 per cent on the turnover of premises in case of physical casinos.

Singapore, on the other hand, does not permit online gaming, but charges 5-15 per cent tax on the GGR of the two physical casinos that it allows. In the United States (US), gaming taxes are normally imposed by the state legislatures and are roughly around 5-20 per cent of the GGR. Casinos in Las Vegas, for example, are charged a gaming tax of 3.5-6.75 per cent of the GGR.

In addition to state taxes on gaming, the US levies a federal excise tax of a mere 0.25 per cent on every wager in sports betting that is legal and authorised by state law (and 2 per cent on illegal and unauthorised wagers), which is also viewed as prohibitively high by the industry with active efforts in the Congress to repeal the tax.

Lessons for the GST Council from Kenya

One would struggle to find any example of a jurisdiction that has imposed tax on the face value of bet and had any semblance of industry survive. The only example of a bet on an entire wager amount in recent times that I can recollect is Kenya, where in 2019 a 20 per cent excise betting tax was introduced on every stake (bet) by the Kenyan government.

The move was cited as being impractical, with international betting companies Sportpesa and Betin, who had made major investments, exiting operations in the country.

The Kenyan parliamentary finance committee noted that the higher rate had led to lower revenue because of the market exits and, ultimately, the 20 per cent tax had to be rolled back and reduced to 7.5 per cent.

Recent attempts by certain parliamentarians to restore the tax on stakes to 20 per cent was rejected by the Finance and Planning Committee, with the ultimate Finance Bill that was signed into law keeping the tax intact at 7.5 per cent.

Examples from any jurisdiction in the world, including recent attempts by Kenya, will show that taxation on stakes or wager will only result in lower than anticipated tax collections, exit of legitimate companies who have made large investments, and a flourishing grey market.

In this light, the GST Council’s move to ask the GoM to reconsider the method of taxing online gaming and casinos is a welcome move.

The GoM would do well to study the Kenyan government’s failed move to impose a high tax on face value of bets, as any move to tax bets will ultimately result in tax collections being much less than what is anticipated or projected. Hopefully, the revised GoM report will consider an alternative valuation methodology that will be fair to all stakeholders and ensure long-term revenue buoyancy for the exchequer from this sector.

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