The GST Conundrum And Why India’s Online Gaming Future Remains Uncertain

The repercussions of increasing the tax levied on gaming companies go far beyond what meets the eye. It is not just a financial blow to a nascent and developing gaming industry. It could have a disastrous and irreversible impact on fostering cutting-edge technological capabilities, user experience and consumer welfare, generation of employment opportunities, incoming investments, and growth of the industry itself.

The representation to the Prime Minister’s Office was prompted by the Goods and Services Tax Council of India’s stance to increase the tax rate and impose the highest tax slab. Dubbed the ‘sin tax’, it will be levied upon the total money put in by users during gameplay, as opposed to the current practice of levying tax on the winnings collected by the users. 

A sin tax is an excise tax specifically levied on certain goods deemed harmful to society, for instance, gambling, alcohol products, cigarettes, or horse racing. The sin tax is mainly levied for public health purposes to discourage the consumption of harmful products by making them unaffordable. The equitable treatment of online skill gaming, horse racing and gambling activities by the GST Council’s stance, is based on an erroneous interpretation of the law and is wholly inconsistent with previous judicial pronouncements and state policy. 

The GST Council’s deliberations to impose a uniform rate of 28% on casinos, racecourses, and online gaming is not in line with the government’s steps towards creating an equal opportunity and conducive environment for the growth of the digital gaming ecosystem. This ecosystem is based on enabling users to play games of skill for real money, which is clearly distinguishable from any act of betting and gambling, which operates solely on chance. This distinction has its foundations in erstwhile statutes, and previous judicial pronouncements as well, making the GST Council’s stance all the more abhorrent.

Legal Precedence

The Constitution of India lists ‘betting’ and ‘gambling’ as state subjects, providing powers to the states to regulate the areas of gambling and betting. With the introduction of GST, taxes on entertainment and amusement were subsumed into the GST.

The terms ‘betting’ or ‘gambling’ have not been defined under the GST laws. However, these terms have been defined in Section 65B (15) of the Finance Act, 1994 as “putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”. 

Moreover, the meaning of the terms ‘betting’ and ‘gambling’ has been provided in the case of M/s. Junglee Games India Pvt. Ltd. v. State of Tamil Nadu. The Hon’ble Madras High Court has held that these terms in Entry 34 of the Second List of Schedule 7 in the Constitution of India are limited to betting on activities based on chance only. 

In addition, the Karnataka High Court in the case of All India Gaming Federation vs. The State of Karnataka & Ors, has also defined the terms ‘betting’ and ‘gambling’ as confined to games of chance. The definition of betting and gambling and the judicial interpretation given to these terms seems to restrict its applicability to cases where the winnings are merely on the occurrence of a chance or accident (i.e., a game of chance). 

In view of the above, it is abundantly clear that a distinction has been made between gambling and gaming. Therefore Rule 31A of the CGST Rules, which applies to lottery, betting, gambling, and horse racing, cannot apply to online skill-based gaming platforms. 

Moving on, it is crucial to understand the method of calculation of taxation as well, which has faced much scrutiny from online skill gaming service providers.

GGV vs. GGR

In order to understand the grievances of the online skill gaming industry, allow us to walk you through the following illustration. Currently, online skill gaming operators pay GST at a rate of 18 % on Gross Gaming Revenue, or commonly referred to as ‘GGR’. GGR is the amount of money that an operator deducts as a platform or service fee, from the total entry fee paid by players for the purpose of playing a specific game. 

To illustrate, if two players are to participate in a game of Ludo, with an entry fee of INR 50 each, bringing the total pool to INR 100, and the platform levies a fee of 10%, the GST payable shall be calculated over such platform fees. Accordingly, the operator would be required to pay a GST of INR 1.8, for the platform fees so collected by the platform. It is crucial to remember that the rest of the monies in the pool (100 – 10 = 90) shall be payable to the winners of the game of Ludo.

As opposed to GGR, Gross Gaming Value (GGV) refers to the total amount of money paid by the players to partake in a game. Considering the same illustration as provided above, the GGV would be INR 100, and if 28% GST were to be levied on it, the value would exponentially increase to INR 28, as opposed to INR 1.8 levied in the current regime.

It is crucial to note that the GGV cannot be construed as the total revenue generated by such platforms, this suggestion by the GST Council is counterproductive and not consistent with the judicial position in this regard. 

Operators of such online games charge a meagre platform fee so as to be able to provide stable back-end technology for the smooth functioning of gaming activities and do not directly participate in the contest between the players in any manner. Therefore, in the erstwhile tax regime, the contribution to any prize pool was considered an actionable claim with no service tax or value-added tax applicable on the same.

The Far-Reaching Consequences Of Sin Tax On Gaming

Calculation of an increased rate of taxation over the GGV will be an exponential increase in taxation, and force gaming operators to transfer these costs to the users, which may dissuade users from participation on such platforms. The industry is growing rapidly and is largely composed of new-age startups. These new ventures are rarely profitable and the increased taxation rates would curb their progress even further. 

Further, these platforms primarily rely on VC funds for investments. With excess liquidity drying up from the market, particularly driven by rate hikes in the United States, investors are likely to adopt a conservative approach to fund allocation. They may desist from investing in the gaming sector, in view of the aggressive taxation scheme so proposed. 

Furthermore, the entire exercise could be counterproductive with increased taxation rates not necessarily leading to greater collections in the government’s coffers. This was realised when GST at the rate of 28% was imposed on horse racing in 2017-18, a drastic increase from its erstwhile tax rate. As a result, within just a year of the change, the industry’s revenue dropped by 50% and the resulting tax revenue decreased by 65.5%.

Lastly, if users are forced to pay through their noses for participation, it will inevitably encourage such users to move to offshore illegal betting websites for greater returns on their investments. This will consequently result in a significant revenue loss and perhaps an increase in unaccounted monies, which could then be used for illegitimate activities detrimental to our nation.  

Further, offshore betting platforms are not bound by Indian laws. It could potentially endanger user experience, with sparse attention paid to grievance redressal and consumer safety by such offshore betting platforms.