Online gaming industry braces for impact from 28% GST levy

All eyes will be on next week’s virtual goods and services tax (GST) Council meeting that is expected to clear a 28% levy on online gaming bets.

The move is likely to spark an exodus of gaming firms and put investments in the sector at risk, analysts and key stakeholders said.

The GST Council, which held its 50th meeting on 11 July, decided to levy the 28% tax on the full face value of not only online gaming bets but also casinos and horse racing, indicating the government move to treat games of skill uniformly with games of chance. 

Currently, games of chance are covered under “gambling” and are slapped a flat 28% GST, while games of skill that are played online attract an 18% tax.

Finance minister Nirmala Sitharaman had said at a press meet that the indirect tax body is only concerned with taxation and not the distinction between games of skill and games of chance.

However, investors and analysts have said that the massive levy on online gaming bets will have a debilitating impact on the sector.

“Coupled with the 28% tax rate, the chargeability on full value of bet may be detrimental to the online gaming industry. It may be crucial to see the manner in which the amendments may be carried out in the GST law for levying the tax on gaming service providers,” consultant EY said in a report.

About 30 global and domestic investors wrote to Prime Minister Narendra Modi on 21 July, seeking a review of the gaming tax. They said the levy will impact $4 billion in prospective investments.

Investors including Tiger Global and Peak XV – formerly Sequoia Capital India – have significant investments in Indian gaming firms such as Dream11 and Mobile Premier League.

“This decision of the GST Council ignores over 60 years of settled legal jurisprudence by lumping online skill gaming with gambling activities. This decision will potentially wipe out the entire Indian gaming industry, with the GST liability increasing by at least 1,100%, and will lead to job losses,” an executive of the All India Gaming Federation (AIGF) said on condition of anonymity.

“At this rate of taxation, companies will be paying more in taxes than they will be generating in revenue,” he said, adding that the “only winners in this decision will be illegal and antinational offshore-based gambling and betting platforms which have been providing services illegally in India.” 

The government, meanwhile, seems keen on pushing ahead with the levy despite the widespread opposition to the move from gaming firms who fear the tax would make the business unviable in India.

“Regulatory framework for permissible online gaming is still evolving – recent GST Council decision is based on last three years of our experience, including some bad actors in gaming and online wagering/betting masquerading as gaming,” Union minister of state for entrepreneurship, skill development, electronics and technology Rajeev Chandrasekaran said in a tweet this week.

“As regulatory framework for permissible online gaming stabilizes, we will request GST Council to study and consider new framework,” Chandrasekaran said in the tweet, adding that both the finance ministry and the ministry of electronics and technology are working together on the “approach to challenges and opportunities in the digital space”.

High taxes might discourage people from playing online games. If players have to pay more, they might earn less from the games, making it less appealing.

A back of the envelop calculation shows that when the new tax regime comes into force, total outgo from a player’s winnings, including GST, platform commissions, and income tax, will go beyond 50%.

In effect, for every $100 spent by a gamer, $28 goes towards GST, in addition to a $5-15 charge by the gaming platform, and a 30% tax deducted at source on the winnings withdrawn, if any.

Many countries tax online gaming differently, usually taxing only the platform fee or commissions at between 15% and 21%. High taxes in India might make companies move their business to countries where taxes are lower.

Sensing an opportunity, international gaming firms have stepped in with social media posts on avoiding the 28% levy, The Economic Times reported this week.

Earnings of fantasy gaming firms jumped 24% during the Indian Premier League cricket season from a year ago to over $342 million, with participation from 61 million users, Redseer consultancy said this month.

Market intelligence and advisory firm Mordor Intelligence said the Indian gaming market is projected to grow from $3.02 billion in 2023 to $6.26 billion by 2028, at a compound annual growth of 15.68%.

A growing IT infrastructure and the increasing use of smartphones, aided by the availability of high-speed internet at competitive rates, are key factors contributing to the sector’s high growth rate. 

The spokesperson of AIGF said that the central government has been “championing the online gaming sector for the past year, and many progressive decisions to expand the industry have been made.” 

“In light of these developments, we hope the government will reconsider this recommendation as it will be catastrophic for the 1 trillion-dollar digit economy dream of PM Modi,” he added. 

In a separate development, the GST Council meeting held this month failed to reconstitute the ministerial group in-charge of reviewing a proposed revision of GST rates to streamline tax anomalies and boost revenue collections.

The council failed to appoint a replacement for the post of convenor of the ministerial group, which was held by former Karnataka chief minister Basavaraj Bommai. 

The Bharatiya Janata Party’s loss in Karnataka necessitated the selection of a new convenor for the group. 

The indirect tax body now has to look for a replacement who can deliver rate revision exercise reports in a timely manner, Mint reported on Monday.

The proposed revision is unlikely before the 2024 general election, the report added.