Online Gaming Industry Faces Uncertainty After 28% Tax Announcement

The online gaming industry will be significantly affected by the announcements of the GST Council in its 50th meeting last week. It announced unanimously that a uniform 28 per cent tax on full face value for online gaming, casinos and horse racing will be levied. 

The council made it clear that no distinction would be made between skill-based games and chance-based games when it comes to taxation. Not only is real-money gaming going to get a lot more expensive, once the decision comes into effect but, according to gaming platforms, this may also put the future of the booming industry in jeopardy.

The GST Council's Recommendations And Their Impact

Based on the council's recommendations, taxes will be imposed on the amount spent to purchase chips in a casino, the total value of bets placed through bookmakers or totalisators for horse racing, and the full value of bets made in online gaming. Finance Minister Nirmala Sitharaman asserted that the intention behind the decision was not to harm the industry. "No one wants to kill an industry, but they can't be encouraged to such an extent over essential goods and services," she said. Nevertheless, gaming companies disagree.

Expressing concern regarding the announcement, Roland Landers, CEO, The All India Gaming Federation said, "We believe this decision by the GST Council ignores over 60 years of settled legal jurisprudence by lumping online skill gaming with gambling activities. This decision will potentially wipe out the entire Indian gaming industry, with the GST liability increasing by at least 1100%, and will lead to lakhs of job losses." 

According to Landers, the tax valuation will account for huge losses for the companies as they will be paying more than they will be generating in revenue. Upon implementation, the government anticipates an additional annual revenue of approximately Rs 20,000 crore from Indian online gaming companies, making a significant jump from last year's GST collection from the industry, which amounted to only Rs 1,700 crore. In an interview with Press Trust of India, revenue secretary Sanjay Malhotra said, "One of the members, in fact, in the GST Council pointed out that the way the online gaming companies are paying the taxes on online games at 18% of GGR, which works out to only about 2-3%, even lower than the tax rate of 5 per cent levied on many of the food products consumed by the very common people."

Nikhil Pahwa, founder, MediaNama in a conversation with Govindraj Ethiraj, founder of The Core termed the decision a "huge blow" as the real money gaming industry was "really pushing for the GST to be on all the services component, or on the winnings that happened from this money, not treated like a full value."

On the ongoing debate around the distinction between skill and chance-based games, Pahwa added, "Gambling by itself is a state subject in India, and states regulate them differently, like in Sikkim, it's legal, in Nagaland, it's legal(for games of skill). Goa has casinos. So, different states are allowed to take a call whether they want to allow gambling in their state or not. And the real money gaming industry has actually coined that phrase, 'real money gaming' in order to distinguish themselves from gambling. There is one new answer that they are games of skill."

Addiction, Ad Violations & More: Concerns Surrounding Online Gaming

The real money gaming industry, particularly gambling games, has always been a debatable topic for both moral and legal reasons. Multiple reasons contribute to their constant scrutiny in the gaming realm.

Owing to the increasing cases of suicides due to online betting, Tamil Nadu banned online gambling in the state, earlier in April this year. According to the Prohibition of Online Gambling and Regulation of Online Games Bill, online gambling service providers shall face punishment with imprisonment for an extendable term of up to three years or a fine which may extend to ₹10 lakhs or both. Advertisements in any form that promote online gambling or playing online games of chance with money or other stakes are also prohibited in the state. 

"I think the idea of fantasy sports is debatable, because you're picking a team, you're trying to understand and there is a certain amount of skill that may be involved. But in card games, in particular, offline gaming is different from online gaming, as who knows what the algorithm behind giving you the cards that you've been dealt is about? So there are complexities in the online version, and therefore, I think there needs to be a more nuanced look at these things," Pahwa said. 

Advertisements related to real money gaming further add to the existing concerns. Recently, the Advertising Standards Council of India (ASCI) in their annual complaints report for FY 22-23 regarding advertising violations found that real-money gaming has now become the leading category for problematic advertisements. Not only was real money gaming the most violative category, but it was also the most non-compliant sector in the report. The report stated that 92% of ads in the real money gaming category missed adding the required disclaimer that informs consumers of the financial and addiction risks. 

Also Read: How Online ‘Dark Patterns' Deceive Us On The Daily: ASCI CEO Explains

What next?

The government is now expected to introduce a legal amendment during the upcoming monsoon session of Parliament to facilitate the recommendations by the GST council. Based on the recommendations, suitable amendments will be made to law to include online gaming and horse racing in Schedule III as taxable actionable claims. 

Gaming companies believe that imposing a 28% GST on the full value is a devastating move for the industry, which could result in subsequent job losses, affect foreign direct investments and limit the expansion of a growing industry.

Ankur Singh, Founder & CEO, of Witzeal Technologies, a gaming technology company said, "If implemented as law, this decision will undoubtedly result in the closure of numerous gaming companies. The consequences of this move extend beyond the gaming industry itself and could potentially hinder foreign direct investment in new sectors, as investors may lose confidence in the overall development of the sector."

Urging the government to reconsider the recommendations, Landers said that the illegal and offshore-based gambling and betting platforms that have been providing services illegally in India will be the only winners in this decision.

He added, "The central government has been championing the sector for the past year and a lot of progressive decisions to expand the industry have been brought. We sincerely hope there will be a rethink and a stable and progressive regime is brought, which will help the industry grow, and provide safe platforms to digital nagriks, all the while increasing the tax revenues."