Explained | Will 28% GST on online gaming affect its growth?  Premium

Government levies 28% GST on online gaming, raising concerns of reduced prize pool, FDI, employment opportunities; industry maintains online gaming is different from gambling; debate on game of skills vs chance continues, lacking methods for evaluation

The story so far: At the recently concluded 50th GST Council meeting, it was decided that online gaming would be taxed at 28% on the full-face value of the placed bets. Elaborating on the move, Finance Minister Nirmala Sitharaman clarified that the idea was not to hurt the industry. However, she stated, there was a moral question: whether the industry (also including casinos, horse racing) can be endowed greater encouragement than essential goods. The Minister also stated that the endeavour was to simplify the mechanism, eradicate complexity and imbibe transparency. The decision was not greeted with enthusiasm.

Gaming platforms charge an entry fee from the user to allow them to participate in a particular game. Say, the amount is ₹100. The platform operator deducts a certain amount of this entry fee to run the game and the overall platform, known as the gross gaming revenue (GGR). The rest is transferred to the prize pool. In our example, let us peg the GGR at ₹20. Till now, GGR was liable to be taxed at 18% — this implied the operator would have to pay ₹3.6 as taxes. However, the latest provision means that tax will be levied on the entry bet (that is, the ₹100 in our example) at 28%, taking the taxation amount to ₹28. Broadly, this will translate to lesser money to charge the necessary platform fee from, and also, lowered available resources for the prize pool. A further disincentive, the industry argues, is the existing 30% taxation that is levied on the user on their final winnings.

Malay Kumar Shukla, secretary at the industry body E-Gaming Federation, termed the decision “extremely unfortunate”, saying “a tax burden where taxes exceed revenues will not only make the online gaming industry unviable but also boost black-market operators at the expense of legitimate tax-paying players, further undermining the industry’s image and capacity to survive.” The move also raises concerns about its growth trajectory. For perspective, a combined report (published in April 2023) by consulting firm Deloitte and the Federation of Indian Fantasy Sports had noted that the industry grew 31% to ₹6,800 crore in FY2022. It is estimated to touch ₹25,240 crore by FY2027. With respect to its contribution to the Indian economy, it noted that the industry attracted ₹15,000 crore in foreign direct investments (FDI) till FY2022 and is expected to invite ₹25,000 crore in FDI by FY2027.

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Roland Landers, CEO at the All-India Gaming Federation (AIGF), told The Hindu, the steep rise in GST will discourage both domestic and foreign investors from considering the domestic ecosystem as a viable investment destination. “Marquee investors are already placing their decisions on hold amid the regulatory uncertainty,” he claimed. According to Pearl Agarwal, Founder and Managing Director at Eximius Ventures, “reduction in winnings available for gamers will lower engagement and revenue of gaming platforms, severely impacting the current valuation several large gaming companies have raised.” Other than this, concerns also exist about the potential loss of employment opportunities in the sector.

The government has stated that it would be making suitable amendments to include online gaming and horse racing in Schedule-III of the Central Goods and Services Tax Act (2017), deeming them as taxable actionable claims. This will bunch online gaming together with gambling. For perspective, the legislation deals with “activities or transactions which shall be treated neither as a supply of goods nor a supply of services”. It excludes lottery, gambling and betting. The debate about game of skills versus chance deals with an evaluation of the attributes of the game in question. One of the key attributes of a skill-based game is the reliance on psychological or physical abilities than luck for a favourable outcome. While an element of chance is involved in games of skill, each player’s unique set of skills determine their success rate. This is unlike a game of chance where the outcome is totally dependent on luck. The user cannot influence the outcome.

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