A Group of Ministers (GoM) chaired by Meghalaya CM Conrad Sangma established to look at taxation of online games, casinos, and race courses, has recommended hiking GST on these services to 28 pc. At present, the GST levied on online games involving betting or gambling is 28 pc, and other games is 18 pc. A tax of 18 pc is also imposed on the commission collected by online gaming platforms for each game.
The current GST of 18 pc is levied on gross gaming revenue — the margin between amount wagered and amount won by users. The GoM has recommended a blanket 28 pc GST on the entire ‘face value’ or ‘bet amount’.
Medianews4u.com spoke with gaming companies and a legal expert on how the taxation proposal will impact Indian gaming companies, especially the smaller players.
“Globally, most countries have regulated the online gaming sector with specific legislations dealing with various aspects of online gaming such as licensing, taxability, valuation, etc. For instance, the UK levies a separate duty on online gaming called ‘Remote Gaming Duty’ (RGD) which is levied at 21pc on ‘profits’ of the remote gaming provider and played by the UK residents. Further, ‘profits’ would mean, the difference between the total amount due from the UK residents and the amount paid separately as prizes or that goes into the pool of winning money. Therefore, in essence, the tax is levied on the ‘rake fees’ earned by the gaming companies who conduct games on their platforms. Further, globally, the tax rate for online gaming is around 20 pc,” says Abhay Sharma, CMO, MetaOneVerse.
“The imposition of 28pc GST could act as a deterrent to the entrance of marquee global players. It’s important to note, the Supreme Court of India has clearly established the difference between ‘Games of Skill’ and gambling or ‘Games of Chance’. Therefore, online gaming and casinos/race courses should never be painted with the same brush,” he adds.
At the same time, Sharma believes that the online gaming industry should be prepared to pay their fair share of taxes to the exchequer and contribute to nation building, and a healthy tax rate would be good at 18 to 20 pc.
“The 28 pc tax on the gross gaming revenue or platform fee earned by the gaming companies is unreasonable given that globally we are fighting with recessions, hikes in commodity prices, decreasing value of the rupee and unprecedented financial burden. This kind of tax system will be a deterrent for small players, and we will be seeing them getting merged into big players or getting liquidated soon. It will have an adverse effect on the gaming boom that India is witnessing at the moment, specifically in tier 2 and 3 cities, which are price sensitive. An average gross margin in gaming is approximately 20 pc and the addition of GST will force the companies to charge more from the users while forcing some of them to stop playing, resulting in decline instead of growth,” he explains.
“From an industry perspective, this proposal may stymie the growth of online gaming companies, as the introduction of a 28 pc GST will raise the cost of participation, thereby reducing the number of gamers (India is home to over 420 million gamers, which is second highest in the world), leading to a loss of business. This is undoubtedly not a welcome step for a nascent and highly competitive industry. This would also be seen as against the spirit of the start-up India plan,” observes Santosh Vikram Singh, Partner- IP and Sports Law, Fox Mandal & Associates.
Rohit Agarwal, Founder & Director, Alpha Zegus, an agency specialising in the domains of gaming and lifestyle, feels it is not in the best interest of Indian gaming companies, especially small players, to be subjected to 28 pc tax.
“For an industry that is just starting to take off and get recognition, a higher tax bracket is going to act as a heavy turbulence in its growth. Gaming companies already struggle to get the Indian consumer to pay for in-app services, and an increase in tax bracket is going to make that process even more painstaking. An ideal case would have been an even further reduction (from 18 pc) to give the industry a good kickstart and then adjust the percentage to acceptable levels,” he adds.
According to Yash Pariani, Founder & CEO, House of Gaming, for the gaming business to thrive in the future, it will be necessary to sharply define skill-based and other games. He notes that game creators have strict restrictions in place, including those on gambling and betting organisations from sponsoring competitive e-sports tournaments. “So the betting and gambling tax legislation will have limited influence on e-sports,” he adds.
Will this decision drive gamers away?
According to Rishabh Bhansali, Co-Founder, FanClash, “The GoM proposal is expected to drive players away from legal skill gaming platforms — which generate significant tax income for the government — and towards the unregulated market, giving a three-fold blow to the business, players, and the taxman.”
“The proposal to keep games of skill and chance on par, will be massively detrimental to the Indian gaming industry, which is expected to grow to the size of $5 billion by 2026. The levy of tax at 28 pc will cause major cash flow disruptions across the industry,” observes Abhay Sharma.
Rohit Agarwal has a different opinion. “It will not necessarily drive away gamers, because quite some in-game features still remain free to use. Also, people who are accustomed to making in-app purchases are going to continue to do so. However, this move will act as a very big roadblock in converting non-paying users to first time payers, since they will be of the opinion that they are getting less value for their money,” he observes.
“The black market operators will siphon revenue from legitimate tax-paying operators, opening the door for money laundering and funding of other illegal businesses. Moreover, the gaming platform operators will be unable to continue operations at any meaningful level. Growth, innovation, employment opportunities, government revenues, and, most importantly, responsible and safe gaming will be significantly impacted,” says Sharma.
“The decision to treat skill and chance games equally will have a significant negative impact on the Indian gaming industry, which was set to reach $5 billion in revenue by 2026. The resultant lack of distinction between these business divisions in the consumer minds could have a huge impact on adoption of skill-based gaming. As a result, increased effort and marketing spending are required to catalyse consumer and category adoption,” says Rishabh Bhansali.
“This decision will require gaming companies to realign their marketing messaging; they will have to drive slightly further away from the cost proposition of in-app purchases and push more towards other rewards and benefits. Apart from that, they will also have to make adjustments to their UI/UX for the audience to feel ‘okay’ with the extra money they have to pay. All in all, the companies will have to make strategic changes to distract the audience from the change,” concludes Agarwal.