Resetting The Board: A Call For Clarity And Reconsideration In Online Gaming Taxation In India

In the ever-evolving world of technology and e-commerce, there lies a vibrant and often misunderstood sector — online gaming.

Touted as one of the fastest-growing industries in India, it stands today at the cusp of innovation and policy, awaiting clarity in its taxation structure under the goods and services tax (GST) regime.

A sector of such magnitude, influence as a source of entertainment, and potential requires a nuanced understanding, a fine balancing of public policy, law, and economics, devoid of myths and assumptions.

The GST Council, as a decision making body, has a crucial role in ensuring a fair, conducive, and growth-oriented taxation framework for online gaming in India.

To underscore the criticality of sound and informed policy-making, let us revisit an intriguing episode from the history of public policy and tax laws — the Poll Tax Riots of 1990 in the UK.

The British government under prime minister Margaret Thatcher introduced a flat-rate 'Community Charge' popularly referred to as the Poll Tax, with an aim to replace the existing local taxation system. The government’s assumption was that a flat rate tax would simplify taxation and share the tax burden more evenly.

However, this simplification overlooked the socio-economic disparities among the public. The ensuing outcry was severe, leading to widespread protests and the infamous Poll Tax Riots.

The policy was eventually abandoned, marking a turning point in Thatcher's political career. This historical anecdote stands as a stark reminder of the repercussions of policy-making based on incomplete understanding or misassumptions.

Debunking Myths And Establishing Facts

In the context of online gaming in India, certain prevailing myths have obfuscated the clarity in its GST implications. To build sound public policy, it becomes essential to debunk these myths and understand the facts.

Myth 1: Online gaming activity is a supply of goods and hence taxable.

Fact: The reality of online gaming is far from being a supply of goods. It is a complex interplay of several services that include provision of gaming software, facilitation of contest creation, administration of payment services and wallets for the deposit of prize pool money, tabulation of points, data collation, updating leader-boards, disclosure of winners, and secure transfer of winnings.

Furthermore, deposits made by players towards the prize pool are devoid of any consideration for supply by the online gaming operators. The GST Act categorically states that such actionable claims (except for lottery, betting, and gambling) aren’t subject to GST.

Misconceptions around the character of online gaming have repercussions on industry growth. Over-taxation, stemming from the wrongful categorisation of online gaming as a supply of goods, can limit sector expansion, restrain technological innovations, and affect the player experience.

Myth 2: Online gaming is equivalent to betting, gambling, and lotteries.

Fact: Legal precedents in India distinguish games of skill (inclusive of many online games) from games of chance (betting and gambling).

The Supreme Court has reiterated that skill-based online games don't constitute gambling, betting, wagering. Recently, this separation was recognised by the central government through Information Technology Rules by MeitY and the Finance Act 2023, affirming the distinct nature of online gaming.

Equating online gaming with gambling, betting, and lottery disregards the skills employed by players and discourages the growth of an industry that can positively contribute to the digital economy.

Furthermore, such equivalence can invite unnecessary regulatory scrutiny and may cause reputational harm to a burgeoning industry.

The approval of online games as Permissible Online Real Money Game by the Self-Regulatory Body will further establish those games as not being equal to betting, gambling and lottery.

Myth 3: Any differential treatment of online gaming with lottery will lead to substitution and litigation.

Fact: The assumption overlooks significant differences between online gaming and lotteries, each demanding distinct tax considerations. Online gaming, being a skill-driven and participatory activity, bears little resemblance to lotteries which are based purely on chance and have been considered res extra commercium by courts.

This myth indicates a propensity to oversimplify complex issues, leading to blanket tax treatments. A nuanced understanding is needed to differentiate between these diverse sectors and apply suitable tax regimes.

Myth 4: The distinction between games of skill or games of chance is of no relevance for the GST regime.

Fact: Indirect tax jurisprudence in the pre-GST and post-GST regime has always distinguished between betting, gambling, and online gaming while determining the rate of tax and value of supply.

For instance, Section 66D of the Finance Act, 1994 provided for a negative list of services that included betting, gambling, or lottery (meant only game of chance). Online gaming was part of the definition of OIDAR services as per Service Tax Rules, 1994.

A different interpretation by tax authorities would mean altering the legal jurisprudence and constitutionally protected status of the legitimate business, ie, online gaming.

This myth's pervasiveness can lead to the application of disproportionate tax rates to online gaming, which can curb the industry's growth and make it less competitive on the global stage.

Global Perspective And The Call For Revaluation

India's effective taxation on the online gaming industry, with 18 per cent GST on GGR and 30 per cent TDS, is significantly higher than other nations. Let's consider some of these countries' practices to gain a global perspective and draw useful insights:

USA: GST ranges from 3.5 per cent to 28 per cent on Gross Gaming Revenue (GGR). Federal Income tax is levied at 24 per cent only if the payout is 300 times more than the contest entry amount and crosses a threshold of $600; State Tax ranges from 2 per cent to 24 per cent on net winnings. Most states have a de minimis threshold requirement.

UK: GST stands at 21 per cent on GGR with no TDS.

Australia: GST is between 10 per cent - 16 per cent on GGR with no TDS.

Singapore: GST is 7 per cent on GGR with no TDS.

Italy, Austria, and Sweden: GST is 20 per cent, 20 per cent, and 18 per cent on GGR respectively, with no TDS.

A comparative glance at these countries highlights a stark contrast in the taxation approach towards online gaming. It is evident that the absence of TDS and the significantly lower GST rates on GGR promote industry growth and innovation.

It encourages players to participate more and can potentially increase government revenue in the long run.

Contrarily, in India, high tax rates can dissuade players, lead to capital flight, and make Indian gaming companies less competitive internationally. A balanced taxation approach could not only lead to more revenue for the government but also foster the growth of the industry.

The online gaming landscape and its regulatory framework have been evolving rapidly. It is crucial for the  GoM to reconvene and reassess its stance, addressing the myths and revisiting the facts discussed above.

The Poll Tax Riots anecdote serves as a compelling reminder of the need for policies to be rooted in a robust understanding of the sector, not guided by misplaced assumptions.

In essence, a comprehensive revaluation is needed to reframe our tax policies for online gaming, tailored to its contemporary realities. It would serve the industry, the players, and the government's best interests, fostering growth and maximising revenue.

Drawing lessons from history and aligning our understanding with global best practices are paramount in this endeavour. As we reset the board, it is time to redefine our perspective, ensuring our tax laws reflect the reality of online gaming and promote a sustainable, vibrant industry.