The online gaming industry in India grew from being a US$ 500 million industry in FY 2016 to approximately a US$ 2.6 billion industry in FY 2022. Growing at a CAGR of estimated 27%, the industry is expected to reach approx. US$ 8.6 billion by 2027. The current foreign investment into the industry is approx. US$ 2.5 billion with no significant investment in the last two years. It is estimated that the online gaming sector employs approximately 50,000 people directly and has created more than one lakh jobs indirectly.
A previous KPMG report of 2021 had stated that in 2020, online gaming was the fastest growing sector in India’s Media and Entertainment space.2 The report projected India to have 657 million users by FY 2025. Online gaming as an activity has become popular among people of all ages and backgrounds in India. Broadly there are two types of online games – casual games and real money online games. While the former is offered to and can be played by people of all ages, the latter is offered to only adults (above 18 years of age) considering that it involves real money
There is a clear difference between games of skill and games of chance, as established by way of a catena of judgments of the Hon’ble Supreme Court and the various Hon’ble High Courts. The oldest of these judgments’ dates back to 1957. Based on several judgments, skill-based games have been recognised as a legitimate business activity protected under Article 19(1) (g) of the Constitution of India, whereas games of chance fall under the category of res extra commercium activity. Games of chance have been prohibited across the country barring a select number of States, who have permitted the same, with certain conditions. The distinction between games of skill and games of chance impacts the legal status and regulatory framework (including taxation), applicable to different forms of online gaming
Recently, online games of skill have been recognised by the Government of India as a distinct category from betting and gambling. The Government of India (through the Ministry of Electronics and IT (MeitY)) has amended the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Intermediary Rules 2021”) and brought about amendments to the Income Tax Act, 1961. The Intermediary Rules 2021 provide for the formation of a self-regulatory body (to be approved by the Ministry of Electronics and Information Technology) (“SRB”), which has been tasked to approve the games/ formats being offered by Online Gaming Intermediaries. All games that are approved by the SRB shall be subject to adherence of the parameters provided in the Intermediary Rules and, upon approval will be accorded the status of being a Permissible Online Real Money Game. The Intermediary Rules also require that no game that allows wagering on any outcome shall be permitted, meaning thereby games of chance shall be prohibited
In terms of direct taxation, the Ministry of Finance (in the Budget 2023) amended the Income Tax Act to introduce new provisions for online gaming, distinct from betting and gambling. The two new Sections, 115BBJ and 194BA, provide for levy of 30% tax on the player’s net winnings (as defined in the Income Tax Rules, 1962). These Sections brought two key changes: (a) no minimum threshold amount to deduct TDS at 30%, as compared to the previous threshold of minimum amount of INR 10,000 in a single game, and (b) Net winnings in the user’s account to be subject to prescribed withholding tax at the time of withdrawal, and where there is no withdrawal during the year, the deduction to be undertaken at the end of the financial year
The levy of GST on online gaming in India has been a much-debated issue and there have been different viewpoints among policymakers, industry experts, Government, Gaming companies and the users/players
Currently, online skill-based real money gaming is being taxed at 18% of the gross gaming revenue (“GGR”) or the platform fee, which is the amount retained by the platform for providing the platform to the players/users. The GGR is, generally, a percentage of the value of the Contest Entry Amount (“CEA”) contributed by the users in a particular game. The rate of 18% was on the basis that the games being provided are games of skill and therefore are permitted activities. On the other hand, games of chance/gambling and betting activities (like lottery) attract 28% on the full-face value.
Further, in 2022, the GST department equated games of skill to games of chance and issued a show cause notice demanding 28% on the full value of the contribution by the players along with penalty and interest from one of the online gaming operators and demanded a sum of INR 21,000 crores. This position was in complete contrast with the law that only chance-based games be taxed at 28% on the total bet value, while games of skill be taxed at 18% on the GGR. It is imperative to note that for skill-based online games the primary taxes are the GST on the platform fee paid to the gaming operators and TDS of 30% on total winnings of the gamers, there are no other taxes levied on players. Further, in addition to the GST, income of the online gaming operators from conducting online gaming is also taxable under the Income Tax Act, 1961.
The Hon’ble High Court of Karnataka in the aforesaid matter (Gameskraft Technologies v. DGST & Ors.) distinguished between games of skill and games of chance, and reiterated the position that online rummy being a game of skill falls outside of the scope of “supply” under Section 7(2) of the CGST Act and therefore not taxable. The Hon’ble Court also held that a game of skill is different from ‘betting’ and ‘gambling’ under Entry 6 of Schedule III of the CGST Act
A Group of Ministers (“GoM”) was formed to examine issues related to online gaming and to look into the appropriate rate and method of valuation.3 The GoM constituted of ministers from eight Indian States The GoM debated the matter and could not arrive at a consensus due to the differing views. In its initial report to the GST Council (which is responsible for recommending tax rates in India) in June 2022, the GoM recommended a flat tax of 28% on the full-face value of the bet for online gaming. The decision did not fructify as there were differing views, and a decision was taken to park the issue for further review
47th Meeting (June 28-29, 2023)
The GST Council discussed the GoM’s initial report and deferred its decision to raise the GST from 18% to 28% on online gaming as well as bringing it on par with games of chance like betting and gambling.
Thereafter, the GoM conducted field visits, held discussions with industry stakeholders in order to make an informed decision. While West Bengal and Uttar Pradesh favoured 28% GST on the full-face value of bets placed, Gujarat suggested levying a 28% tax on platform fees. Meghalaya was of the view that 28% tax should be levied on the platform fees and also proposed the creation of a specific escrow account for accumulation of pool prize money for easier administration of tax. Goa favoured 28% GST on platform fees of gaming operators, while Tamil Nadu and Telangana suggested 28% GST on GGR.
In a complete contrast to the present regime, and despite the different opinions of the members of the GoM, the GST Council at its 50th Meeting recommended a levy of 28% GST on the full value of bets for online games, regardless of whether they are based on chance or skill. This decision was met with sharp reactions from various quarters including the online gaming industry, with some companies expressing concerns that it would destroy the industry and lead to closure of operations by several companies. The decision of the GST Council to tax 28% on the full-face value of the bets placed in a game would be in complete contrast to the existing tax regime, under which the GST is only levied on the platform fee that gaming companies charge for facilitating the games
Based on the industry outcry, various views form experts, the investor community the other various representations, including the fact that if GST is levied on the full value of the bets, the same will result in taxing the same rupee multiple times, the matter was once again placed before the GST Council.
The GST Council in its 51st Meeting, while reiterating the levy of GST at the rate of 28% on the full value, also issued a clarification to the Council’s recommendations from the 50th Meeting, that the full value shall be the amount deposited by the player at the entry point, excluding wins from previous games, and not on the full value of the bets placed. Further, the Council also stated that offshore operators would be required to obtain a GST registration and comply with Indian tax laws
After the GST Council submitted its recommendation, the CGST (Amendment) Bill, 2023 seeking amendment to CGST Act to bring these changes into force was introduced before the Lok Sabha and passed on August 11, 2023. Thereafter the bill was placed before and passed by the Rajya Sabha. The provisions of the bill, once presidential assent has been provided, will become an Act and is expected to come into force with effect from October 01, 2023.
Separately, the GST Council also recommended revisions to the Integrated GST (Amendment) Bill, 2023, aiming to bring stringent registration requirements for offshore gaming operators. This bill was also passed on August 11, 2023 and has been sent to receive presidential assent. The GST council also announced that the proposed decision shall be reviewed after a period of six (6) months from the effective date of the amendments.
The industry believes that 28% GST on the full value is a significant increase and will result in a ~350% increase in tax in comparison to the current regime. This would also lead to levy of GST at rates significantly higher than the GST rates for other forms of entertainment, such as movies and music. This has led to concerns that the legitimate industry shall become less affordable for consumers and could lead to a decline in the number of people who play online games, thereby setting the industry back by several years. Further, the same is also inconsistent with online gaming regimes around the world, where a VAT is imposed at nominal rates, and that too, on platform fees of the gaming operator. Additionally, the decline in the online gaming industry will pave the way for a significant number of users to play on illegal online offshore gambling and betting sites resulting in the users getting exposed to such illegal offshore operators, where there are no protections are accorded to users and also there lies no obligation or requirement to follow the Intermediary Rules, 2021. This would also result in a loss of valuable foreign exchange for the Country. The new regime has also resulted in a set-back to investor confidence, which may result in slow down of investments in the sector.
On the other hand, the government has defended the decision on the basis that it is necessary to bring online gaming in line with other forms of gambling, such as lottery and casinos and that the issue of addiction requires to be addressed.
While it is acknowledged, without any doubt, that the decision of the GST Council has resulted in the removal of the uncertainty, however it will set the industry back by at least a couple of years forcing the industry to relook at its business models and innovate for profitability, customer acquisition, and customer retention, while being cost conscious. It also appears that the Government has failed to balance the benefits of generating revenue for the benefit of the people, with the potential negative effects of taxing online gaming, and making a decision that is in the best interests of the country as a whole. The levy of 28% on the deposit has slapped many gaming operators across the face, with some announcing large scale layoffs and some even evaluating winding up of operations. The booming sunrise industry will see a tremendous setback for a few years.
Previously, there was no GST burden on players as most gaming operators would absorb the GST. However, this position is expected to change with the new regime kicking in. The industry hopes that the Government provides sufficient time to the industry to understand and implement these changes, in order to become compliant with the new regime.
(Note: The contents of the Article are the personal views of the author and should not be attributed to the company or any other individual or organisation)
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