What Does The Proposed GST Hike Mean For Indian Gaming Startups?

In the last decade, technology-driven businesses in India have taken to the skies. The government’s various initiatives to invite all Indian citizens onto the digital verse and equip them with access and guidance to navigate this space have transformed people’s lives. 

The government’s commitment to increasing the use of digital technology is changing the way people in India live. Even Prime Minister Modi recently stated that India is quickly becoming a world leader in the digital revolution, particularly in online gaming.

Rise Of Convenience Based Platform Businesses

With the trend of digitisation sweeping over, the convenience brought in by platform businesses like Amazon, Flipkart, Zomato, Swiggy and the likes, has been unparalleled. These ingenious business models have created a medium for people to conduct business on, for sellers to display their wares and for consumers to pick and choose – all whilst charging a commission as their fees. 

These platforms’ GST payments are only applicable to the service they provide, which is a secure platform where consumers can enjoy a convenient shopping experience. Such convenience-driven business models have quickly become a staple in every Indian household.

As more traditional content moves online, gaming is no exception, and as a result, online gaming has thrived in recent years. Online gaming platforms, particularly skill-based ones, operate on a business model similar to the one described above, in terms of the service provided to the consumer. 

With their secure technology and well-stacked inbuilt algorithms, online skill-based real money gaming platforms provide a medium for gamers to partake in games of their choice. These platforms’ service is the provision of this medium so that players can enjoy their chosen game. 

Now let’s concentrate on one of the core principles of the CGST Act, which states that the value of supply must equal the actual transaction value. This clearly states that the tax can only be levied on the amount paid for the provision of a service. This is how the online gaming industry has been taxed up until now.

The Taxation Conundrum

During the 47th GST Council Meeting, the Group of Ministers (GoM) made recommendations to change this approach. They proposed taxing the entire amount of consideration rather than just the amount of supply (also known as the platform fee or Gross Gaming Revenue or GGR). 

This has alarmed the industry, which would face a nearly 1,000% increase in taxation and inevitable roadblocks if the recommendation is implemented. Furthermore, the industry is perplexed by the possibility of tax differentiation between online gaming and other platform-based business models.

“Looking at the recent growth in gaming platforms and applications in gaming business, a re-examination of GST taxability by GoM may hamper the speedy growth of the entire sector and lead to migration of skilled people from India to tax-friendly nations.” said Girish Vanvari, founder of tax advisory firm, Transaction Square.

Online Gaming As A Platform Business

Not only do online skilled gaming platforms offer the convenience of online gaming to their audiences, but they also have the same foundation as other models with user engagement at the crux. Most gaming platforms instil trust in their revenue recognition to their stakeholders by being thoroughly audited by international audit firms. 

Furthermore, the platforms do not shy away from providing their customers with complete transparency into every aspect of the gameplay, including the winning potential, prize pool, number of contestants competing against them, and entry fee. This is to ensure that consumers remain safe and play responsibly. 

The one thing these platforms do need right now is a comprehensive regulatory framework, not a reworked taxation policy that could stifle the growth of this burgeoning industry.

PM’s Vision for Gaming

The Prime Minister’s overarching vision for the digital space is to empower all citizens with digital skills and to move all services, including transactions, online. This is another area where the principles of the online skilled gaming industry can help. In contrast to other platform businesses where “Cash on Delivery” is an option, here consumers are required to follow an entirely digital transaction. Very few other business models offer a stringent digital means for payment, making this industry’s business secure since all digital transactions can be recorded and tracked.

The online gaming industry has experienced tremendous growth, with over a thousand tech-gaming-based startups entering the market and giving rise to three of our country’s largest unicorns. The Prime Minister himself has expressed interest in advancing digital technology and innovation across a range of industries, including gaming. 

“Keeping the digitisation push in mind, the GoM after consultation with industry players, experts, and references to laws in other countries may reconsider the GST valuation of gaming transactions” Vanvari further added.

To follow through on this vision and sustain the momentum of this industry, an efficient taxation rate on the right value system is of profound importance.