Online Gaming: Need To Balance Regulation, Taxation And Ease Of Doing Business In The Digital Economy

The recent developments in the taxation of the online gaming industry in India have sparked a debate in the gaming industry, policy makers, media and the public.

While the matter was studied by a Group of Ministers for over three years before it was discussed in the 50th GST Council, what appears to have driven the high tax regime are the social concerns raised by many states and the need to tax online gaming at par with gambling activities.

While gambling and betting are a state subject under the constitution of India, online gaming that is not gambling and betting is now regulated by the Central Government under the Information and Technology Rules.

Under these laws, every game has to be certified by a self-regulatory body and adhere to a compliance matrix on KYC, user harm, addiction, losses.

The objective of this regulation is to provide a safe online gaming ecosystem for Indian citizens, including children. Online gaming is a new age digital sector, where a robust regulatory framework is important to address the concerns of the government.

The regulation by MeitY is a good starting point.

The objectives of taxation and regulation shall not be confused, disproportionate taxation can undo the intent of the regulations, by pushing Indian citizens towards harmful platforms and behaviours. Global learnings and benchmarks serve as a stark reminder of how high tax regimes have pushed users of online gaming to illegitimate markets.

Further, taxation of legitimate online gaming higher than the gambling industry, is against the basics of public policy.

While, the Goods and Services Tax (GST) Council insists that by imposing a 28 per cent tax on full value of the bets placed on online gaming it has leveled the field for the industry with horse racing, and casinos, there seems to be a pertinent point the council must take note of.

Earlier last week, over 30 top global investors wrote to the PMO noting that 28 per cent GST when levied on the contest entry amount, everytime a user plays a game, amounts to an effective tax rate of not just 28 per cent, but a staggering 50 - 70 per cent.

To understand why the effective tax rate could be so high, we must understand how online gaming works. To play any online game, a player deposits a particular amount with the platform and redeploys the winnings from the same amount to play further games.

According to the decision communicated by the GST Council, each of these transactions will now be subject to the 28 per cent tax.

Since the winnings will also include the original funds put up by the player, these will be subject to GST one more time, which will then result in an effective tax rate of 50 - 70 per cent as the winnings are deployed across four games or more.This goes against the basic principles under which GST was introduced, which was to simplify the tax system and reduce the 'cascading tax effect'.

Hence, tax on every redeployment of winnings which is already subject to income tax regime in online gaming goes against the principle of ‘simplification’ of tax and complicates GST.

In the case of casinos, where betting and gambling include rounds played with winnings of the previous games, the Group of Ministers noted in the report submitted post the 47th GST council meeting, that it is important to be mindful of the need to maintain a balance between revenue collection and the viability of the casino industry.

They had then decided that taxing each round, once the tax is collected at the entry on the purchase of chips, is neither feasible nor desirable as this would make the casinos unviable.It is therefore only reasonable to tax online gaming in the same way as casinos and be cognizant of the FDI, employment and tech start-ups that the industry has created.

Taxing every redeployment of winnings in online gaming results in an effective tax rate that is significantly higher than 28 per cent, which has the potential to make the entire online gaming industry unviable.A Potential Solution - Tax on DepositsA fair and equitable way to tax the industry would be to levy the GST on the deposits, much like in the case of the casinos.

While the ultimate outcome of the 28 per cent GST decision and its impact on the industry remains to be seen, an approach to taxing the deposits may provide a more sustainable solution for both the industry and the government.

Moving forward, it is crucial for the GST Council to consider the potential consequences of their decisions on the viability of different businesses.

Growing at 40 per cent annually the online gaming industry has already shown huge potential with the market value of the sector crossing $2.8 billion in 2022, and its contribution to the GDP increasing from 0.1 per cent in 2020 to 0.5 per cent in 2022.

In addition, the online gaming industry is expected to create around 250,000 career opportunities by 2025. It would be effective for policy objectives to be supported by tax policy and vice versa.

A well collaborated approach, would infuse confidence in the investors, especially in India’s budding digital ecosystem for which regulations are at a nascent stage and will be evolving with time, is key to the rise of India in this decade.