Online Gaming: Regulatory Policy And Tax Policy Should Be Complementary To Each Other

Recently the Central Board of Indirect Taxes and Customs (CBIC) Chairman Vivek Johri said in an interview that all online gaming companies shall be characterised as offering gambling or betting services and are liable to pay 28 per cent GST on the full value of the bets.

This approach and public finance strategy is somewhat contrary to the stated objectives for public policy by the government.

Before I delve more into the issue at hand, anyone even remotely connected with Public Finance must have read about the Laffer Curve but it baffles me that how many in our policy circles miss this important concept even today.

For the non-finance readers, the Laffer curve is a graphical representation of the relationship between tax rates and government revenue.

It was first introduced by economist Arthur Laffer in the 1970s and has since become a widely recognised concept in the field of public finance.

The basic idea behind the Laffer curve is that there is a point at which an increase in tax rates will result in a decrease in tax revenue, due to the negative economic effects of high tax rates such as decreased incentives to work and invest.

Conversely, lowering tax rates can stimulate economic growth and result in higher tax revenue.

The shape and position of the Laffer curve can vary depending on various factors such as the type of tax and the state of the economy, making it a useful tool for policymakers to analyse the potential effects of changes in tax policy.

Recent Developments Under Direct Taxes and Online Gaming Industry

In my previous article, I had explained how the Budget Amendments introduced by the Finance Minister were beneficial for the online gaming industry.

In a sense the Finance Minister changed the entire perspective of the way the Direct Tax Department looks at this sunrise industry. The amendments introduced effectively:

·   Impose Direct Taxes on the “net winnings” from a gaming activity.

·   Tax Deducted At Source only upon “withdrawal” of funds from user account or end of financial year.

·   Recognises that there could be losses while indulging in online gaming hence not all winnings are “income”.

·   Treats the user account maintained with online gaming intermediary as a running Profit and Loss Account.

The mechanism shall henceforth be guided by newly introduced Section 194BA.

In one of my earlier articles, I had focused on the lack of clear regulations and on the indirect tax aspects of the industry. In her Budget, the Finance Minister laid down clear guidance as far as the Direct Tax regime is concerned with respect to the industry

Recent Developments Under Indirect Taxes and Online Gaming Industry

The Central Board of Indirect Taxes and Customs (CBIC) Chairman Vivek Johri said recently that all online gaming companies shall be characterised as offering gambling or betting services and are liable to pay 28 per cent GST on the full value of the bets.

There are continuous attempts from the indirect tax department to look at this industry as “white goods or sin items” hence being liable to the highest rate of taxes. Such approach is obviously contrary to the various judgments given by the Honourable Supreme Court and High Courts and practically as well. The fact is that a vast majority of our countrymen use online gaming platforms as a mode of entertainment and skill improvement.

The 47th GST Council had met in Chandigarh and the Group of Ministers had recommended that online gaming, irrespective of game of skill or chance, would be taxed at 28 per cent on total consideration.

However, the GST council had asked the GoM to reconsider the recommendations. The GoM has now submitted the final report. While the final recommendations are not clear, it appears that the majority of member states in the GoM are in favour of continuing the current practice of levying 28 per cent on Gross Gaming Revenue for games of skill i.e., games that are not betting/ gambling.

The Major Issues in Approach by CBIC

Have you seen a situation where the taxes a government collects is more than the gross amounts on which those should be levied? If the current approach by Indirect Tax department is followed then we would arrive at such a situation, sooner than later. I will extrapolate this with an example.

Lets assume that a person has to contribute Rs 100 to take part in an online game and like wise 100 people do so. Hence the total money collection done by the online gaming intermediary is Rs 10,000. Assume that the gaming intermediary charges 10 per cent of the total amount as their platform fee or commission and the remaining Rs 9,000 is distributed amongst these 100 participants as winnings.

If the tax proposals to collect GST on entire gross amount i.e. Rs 10,000 in our illustrations gets accepted, the government will collect INR 2,800 as GST where as the total value of the services provided is only Rs 1,000. Technically the tax rate in that case wont remain at 28 per cent but it will be 280 per cent against the total value of services.

If we critically examine the proviso to definition of consideration given under Section 2(31) of the GST Act, it clearly states that “Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”

The Rs 9,000 is actually a deposit being given by the players to the intermediary to ensure that online gamers meet at a particular platform, indulge in free and fair gaming activity and that the intermediary ensures that the winnings are transferred to respective persons in a time bound and fair manner. For such service i.e. to provide a platform, ensure that gamers get to meet like-minded persons and to engage in gaming activities, the platform charges commission, in our illustration it was 10 per cent.

So the fair and legal question here is: what is the value of the service? Is it Rs 10,000 or Rs 1,000?

Why The Issue Is Important

There are several reasons why the online gaming industry should not be charged indirect taxes on total consideration or the prize pool.

Firstly, the nature of the online gaming industry means that it is highly competitive and subject to rapid technological advancements. Imposing indirect taxes on total prize pool could negatively impact the financial stability of the industry and stifle innovation.

Secondly, high indirect taxes may be passed on to consumers in the form of higher prices, which could make the products offered by the online gaming industry less accessible and less appealing to consumers. This could lead to a decline in demand and a reduction in overall revenue for the industry.

Third, taxing the online gaming industry on prize pool could be seen as unfair, as many other industries do not face similar indirect tax burdens. Therefore, it is important to consider the potential consequences of indirect taxes on the online gaming industry before implementing such taxes.

Finally, in the internet space, there is easy substitutability due to easy availability of alternatives. Multiple reports show that globally, whenever unrealistic taxes were levied, users have shifted to offshore platforms.

Policy Parity Is the Need of the Hour

Recent moves by the Ministry of Electronics & Information Technology (MeitY) and Direct Tax Department of the Ministry of Finance have given the online gaming industry the respect that it deserves. MeitY proposed amendment under the Information Technology Act to treat online gaming companies as intermediaries and proposed several measures to regulate online gaming in India.

These measures include the introduction of mandatory registration to operate in India and due diligence for online gaming operators, the implementation of strict security and data protection measures, and the creation of a self-regulatory body to oversee the industry.

The new, proposed guidelines are simple and clear, with a focus on transparency and accountability, and are easy to be implemented and enforced. These are in consonance with the ‘open, safe, trusted, and accountable’ internet philosophy of the Prime Minister.

Currently, the proposals are open for public consultation. With these regulations, it will first be clear who is regulating and what is the compliance expected, addressing user protection and consumer protection. It will also ensure offshore platforms cannot operate without physical presence in India.

Meanwhile, the Finance Ministry made several amendments to the Direct Tax laws, as stated earlier in this article and changed the lens through which this industry was looked at by the various departments.

While these moves are in line with the vision of Atmanirbhar Bharat propounded by the Prime Minister and are highly appreciable, the view of the Central Board of Indirect Taxes and Customs to treat the entire industry as white goods/sin services does not showcase the policy parity approach that is expected from various arms of the same government.

The policy objective of regulation by MeitY is to protect consumer interest and prevent consumer harm, whereas the position taken by CBIC is highly detrimental to crores of consumers who may be lured by non-compliant platforms without any protection to their funds.

Conclusion

I started off the article by explaining what the classical Laffer curve means. The basic idea behind the Laffer curve is that there is a point at which an increase in tax rates will result in a decrease in tax revenue, due to the negative economic effects of high tax rates such as decreased incentives to work and invest.

Conversely, a rational and reasonable tax framework can stimulate economic growth and result in higher tax revenue.

If the proposal to tax online gaming industry on the total consideration is passed then it shall mean the end of the entire sector. It will drive out companies and investors from the market which will ultimately lead to tax revenue loss for the government.

One shouldn’t be setting out to kill the goose that lays the golden egg and at the same time one shouldn’t kill the chicken to get the eggs. What the industry deserves is policy parity.