Temporary Relief For Online Gaming Industry As GST Council Defers Decision To Hike Tax Rate

The GST Council on Wednesday (29 June) deferred the decision on levying 28 per cent tax on online gaming, alongside casinos, horse racing, and lottery, pending further consultations with stakeholders, Union Finance Minister Nirmala Sitharaman said.

Context: Touted as a sunrise sector with the potential to become a $5 billion industry by 2025, the real-money online skill-based gaming vertical, which is a significant part of the broader online games and e-sports industry, is set to see changes in tax structure and incidence.

• A Group of Ministers (GoM) has recommended that online gaming should be taxed at the full value of the consideration, including the contest entry fee paid by the player on participating in the game.

• It also recommended that no distinction be made on the grounds of game of skill or game of chance for the purpose of the levy of GST and should be taxed at the highest rate of 28 per cent.

Online gaming in India: According to a KPMG report, the Indian gaming market is likely to more than double from $1.83 billion in 2021 to $3.91 billion by 2025.

• The total number of players will rise from 433 million now to 657 million.

• Estimates put the number of people directly involved in gaming at just about 50,000.

Government's outlook: Towards its stated objective of making India a $5 trillion economy, the Modi government aims to make online gaming a $5 billion segment.

• “Today, one area that has blossomed very quickly is gaming. There is a very big market for it globally. The youth have joined in (to this trend) very quickly,” the Prime Minister said during a webinar in March.

• “The animation, visual effects, gaming, and comic (AVGC) sector offers immense potential to employ youth," the Finance Minister has said.

Counter-intuitive suggestions: The recommendation by the GoM seems to be on the method of valuation of online gaming, with the intention to charge the ‘full value of consideration, including contest entry fees’.

• Currently, online gaming operators are paying GST only on the revenue that they are making, which is the platform fee or the commission that they are retaining.

• The GoM’s proposal may cause permanent and, perhaps, irreparable harm to the online gaming industry and effectively reduce tax collections from the industry, as most players will continue to game on illegal or grey online gaming websites without any tax.

Deferred for now: A GoM headed by Meghalaya Chief Minister Conrad Sangma has been asked to consider submissions of stakeholders again on the valuation mechanism and submit its report by 15 July. The council will deliberate on the report in August.

Perspective: If gaming is not akin to gambling and involves the use of skill, whether physical or mental, the state cannot arbitrarily place roadblocks in the path of this industry.

The current proposals can potentially herald uncertainty and a revenue crisis in the industry and hamper efforts towards bringing about real ease of doing business.