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“We are disappointed that the GST Board and the authorities have chosen to apply 28% GST on the total entry amount including prize money,” said Joy Bhattacharjya, Director General, Federation of Indian Fantasy Sports (FIFS). This has been a sentiment shared by all stakeholders in India’s sprawling online gaming industry ever since the Goods and Services Tax (GST) Board announced a 28 percent levy on online gaming turnover.
Bhattcharjya and many members of FIFS believe that a change in the assessment of the tax on gross consideration will cause irreversible damage to the industry, lead to loss of treasury revenue, and loss of employment opportunities for lakh skilled engineers. “This decision will have a chilling effect on the $2.5 billion of FDI that investors have already invested and threaten any additional FDI in the sector,” he said, adding that the decision will push users towards illegal betting platforms leading to risks for users and loss of revenue for the government. .
The Indian online gaming industry has seen a huge growth over the years and today there are nearly 1000 companies operating in the industry which employ more than one person. The numbers are expected to grow exponentially, turning the online gaming industry into an economic powerhouse.
Regardless of the outlook, the industry was facing some complex challenges related to the regulatory framework. One such challenge is the application of Goods and Services Tax (GST) to online gaming. While the government has been in the process of finalizing a Goods and Services Tax (GST) structure for the industry, the latest development appears to be quite challenging for many stakeholders in the online gaming industry.
games in India
The recent decision by the GST Board came as a shock to the gaming industry in India which is valued at around $2.8 billion in FY22. When it comes to online gaming in India, taxation and legality largely depends on whether it is considered a game of chance or a game of skill. . Games of chance are seen to attract more excise or GST, while games of skill attract less GST. The council has now argued that there should be no distinction between the two types of games. Long before the decision to introduce a GST of 28 percent, the core dilemma was whether GST should be applied to total cash or just the service item that an online gaming platform acquires.
However, the Finance Minister has now said that the value will be taxed in full. The tax will be imposed primarily on the full face value of the bet placed (or money paid to play the game) and not on the total gaming revenue sought by the industry. Industry insiders feel strongly that this will have a huge impact.
Abhishek Malhotra, managing partner at TMT Law Practice said that while the development came as a shock, it remains to be seen how and on what basis the policy shift will be incorporated into law. “This will require an amendment to the Goods and Services Tax Act, and the amendment will have to be tested on the test of the Constitution. It also remains to be seen whether it will stand up to a constitutional challenge, especially since the Supreme Court and at least two big courts have offered a distinct categorization between games of skill and chance. Compiling all of this, Malhotra said Something under one head is cruel and unsustainable.
Significant impact
The Ministry of Electronics and Information Technology has been designated as the nodal ministry for the online gaming sector and is responsible for giving the industry the boost it needs for sustainable growth. While it wasn’t clear for months what path India would take for its growing online gaming sector, the new tax framework has given the industry more cause for concern. GST is set at 28 per cent on the gross nominal value of gaming and to do this the government will need to amend the GST law by including online gaming under the category of taxable claims which also includes betting, lottery and gambling.
He stated during the press conference that these are only clarifications as the tax has always been intended to be 28 percent of the nominal value. We’ll have to see if these adjustments will be introduced retroactively. If that’s the case, huge demands are likely to be made over the past period as well,” said Shashi Mathews, Partner, INDUS Law.
Matthews added that while the tax rate and taxable amount are entirely within the power of the legislature, it should not be disproportionate or unrelated to the actual consideration. These adjustments will have a significant impact on the industry, and small operators may not bear the burden of these disproportionate taxes, which would be on a par with those imposed on betting and gambling.
legitimate concerns
The latest announcement sparked a barrage of reactions from all stakeholders. It has also been hailed by some as a way to provide a level playing field between online game companies and traditional game companies. Meanwhile, the new 28 percent GST is also believed to limit the ability of gamers in the gaming industry to invest in new games, and this is likely to affect cash flow and potential expansion plans.
said Siddharth Sharma, Senior Vice President, Business Strategy, President, Digital Business. Sharma feels that this will not only hinder the growth of the emerging industry and its applications, but also put pressure on new innovation opportunities.
“This decision does not take into account industry appeals, global precedents and even counters the favorable regulatory environment that has been created for online gaming in recent months. Companies have legitimate concerns that this move will drive users towards illegal betting and gambling operators who are not They follow the laws of the land.”
international practices
To better understand the new tax policy proposed by the government, it will be helpful to see it in the context of taxation of the gaming industry around the world. Globally, there are two GST models in the gaming industry’s gross gaming revenue (GGR) taxation and the sales tax model. GGR is basically the total amount of money that the gambling company brings in through bets deducting the amount paid for winning. Meanwhile, the sales tax form is the tax levied on income from real money winnings from online games. Here the entire prize pool is taxed. Countries like the United Kingdom, Australia, Italy, Sweden, Singapore, Malaysia, etc., follow the GGR model.
When it comes to the sales tax model, it has been noted that this model can greatly increase the tax burden on the platforms, forcing most of them to pass on the cost to customers who later move to external betting platforms. Recently, the United Kingdom changed its turnover tax policy to GGR to prevent gaming operations from moving to offshore locations resulting in loss of revenue for the country. Around the world, many countries have switched from the sales tax model to the GGR.
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