Introduction
In a significant move aimed at regulating and taxing the burgeoning online gaming industry, the Goods and Services Tax (GST) Council approved a 28 per cent GST rate on online gaming, casinos, and horse racing on August 2nd. This decision aims to enhance transparency, accountability, and fair taxation across the sector, encompassing both real-money and non-money games. While the implementation of this new GST rate is intended to bring benefits, questions linger regarding its calculation, application to different game categories, and its potential ramifications for the gaming industry as a whole. The approval of the 28 percent rate was met with both consensus and concerns. While the rate was agreed upon during the 50th GST Council meeting in July, certain states expressed reservations during the subsequent virtual meeting on August 2. Delhi, Goa, and Sikkim raised concerns over the rate’s impact on casinos and online gaming. Despite dissenting voices, the Council chose to move forward with the 28 percent rate on face value due to practical difficulties in implementing alternative mechanisms.
Calculation and applicability
The approved 28 per cent GST rate on online gaming will be calculated based on the full face value at the entry-level. This ensures that taxation is levied on the entire initial investment made by players in the game, thus reflecting the value of their participation. The GST rate of 28 percent on online games, casinos, and horse racing is expected to take effect from October 1. The GST Council has approved the amendment to the GST Act, which now requires approval from Parliament and the legislative assemblies of various states for implementation. While the new rate is poised to generate additional tax revenue, its impact on the gaming industry and taxation dynamics needs careful examination. Recognizing the evolving nature of the gaming industry and the potential effects of the new GST rate, the GST Council plans to review its implementation after six months. An essential point to note is that not all online games will be subject to the 28 per cent tax category. The GST rate applies exclusively to online money gaming, where participants wager real money. Other categories of online gaming, including those not involving financial stakes, will continue to be treated as services and attract an 18 per cent tax rate. This distinction emphasizes the intention to tax only games that are played for monetary stakes, promoting a balanced and fair taxation approach. However, the 28 percent GST rate applies universally, irrespective of whether an online game is skill-based or chance-based. This encompassing approach ensures that all forms of online gaming, whether involving betting or not, fall under the same taxation category.
The unfortunate ramifications
The imposition of a 28% GST on the full face value of consideration for online gaming has raised alarm bells within the industry. This move goes beyond taxing the platform fee alone, impacting the entire transaction amount. Such a high tax rate threatens to disrupt the growth trajectory of the legitimate online gaming sector in India. One of the most immediate outcomes is the increased financial burden on players. The higher cost associated with gaming due to GST could discourage participation and prompt gamers to explore offshore or unregulated platforms that do not levy such taxes. The Internet and Mobile Association of India (IAMAI) has voiced its concerns regarding the drastic implications of this GST decision. The IAMAI highlights that online gaming is fundamentally different from gambling and betting activities. Applying a tax structure that categorizes online gaming under gambling could have far-reaching consequences. Not only does this endanger the thriving online gaming sector, but it also poses a substantial risk to the USD 20 billion industry’s viability. The IAMAI suggests that global best practices involve levying GST on online gaming based on the Gross Gaming Revenue (GGR) and platform fees. The council’s decision to impose a tax on the full consideration amount contrasts with these practices. This deviation would lead to an alarming 1,000% increase in GST for the industry, significantly hindering its growth and future prospects.
Another point of concern highlighted by the IAMAI is the potential damage to investments in the Indian online gaming start-up ecosystem. The sector has witnessed investments of approximately USD 2.5 billion, making it a crucial player in India’s digital economy. The high GST rate could discourage further investments and lead to a halt in prospective Foreign Direct Investment (FDI). This outcome would not only hamper economic growth but also stifle innovation and technological advancements in the gaming industry.
Another unintended consequence of the high GST rate could be the proliferation of offshore and illegitimate gaming platforms. To these platforms, not subjected to the same taxation, would gain a competitive advantage over the legitimate local platforms. Players seeking to minimize their expenses might be tempted to switch to these platforms, thereby undermining the legal and regulated gaming ecosystem in India. This scenario not only erodes the trust of consumers in legitimate platforms but also poses a significant challenge for the authorities in curbing illegal and unregulated gambling activities.
Impact on employment
The imposition of a 28% GST on online gaming revenue places an additional financial burden on gaming companies. Inevitably, companies will need to allocate a larger share of their earnings toward taxes, which could lead to financial strain. Unfortunately, one of the immediate strategies companies might consider to manage this strain is employee layoffs. The layoffs at Mobile Premier League (MPL), a major player in the online gaming industry, exemplify this trend. MPL’s decision to release 350 employees, constituting half of its workforce, was largely driven by the introduction of the new GST rate. The choice to cut jobs highlights the challenges gaming companies face when grappling with increased financial obligations to the government. While layoffs adversely affect the individuals directly impacted, they also have broader economic implications. The loss of jobs leads to a decline in consumer spending, as those who have lost their jobs tighten their belts. This reduced consumer spending can have a cascading effect on other businesses that rely on consumer activity. Moreover, fewer employed individuals translate to lower tax revenues for the government. With a decrease in the number of taxpayers, direct tax collections are expected to drop. Thus, layoffs can contribute to a challenging economic environment, with decreased spending and decreased government revenues.
The bottom line
While the gaming industry and its associations express valid concerns about the high GST rate, the government’s stance revolves around curbing gambling, especially among the youth. The decision to levy a high GST rate is seen as a mechanism to discourage young individuals from indulging in online gaming activities that could potentially lead to gambling addiction. The government’s intentions, while well-meaning, need to be balanced against the broader implications this taxation strategy could have on the legitimate gaming industry and associated economic prospects.
