28% GST on Online Gaming - Huge Win for the Exchequer

In about 2 weeks, the fate of the thriving online gaming industry in India will be decided. Which way will it swing?

Source - iStock

The fate of a thriving industry will be decided within the next fortnight or so, bringing more clarity on whether it will remain viable or face hiccups, when the Group of Ministers headed by Meghalaya Chief Minister – Conrad Sangma, will submit its report to the GST council. This report will carry tax change recommendations for GST on online gaming and casinos.

The industry was walking a tightrope for the past two months when the GoM made the suggestion to increase the tax rate on the industry from 18% to 28% and charge on the full value of consideration. Furthermore, the recommendation saw no distinctions between online games of skill and chance, appropriating the two under a single tax bracket. This suggestion disconcerted the industry players, as it ran the risk of making the entire industry unviable for business by driving its consumer base away. Not only would the move have harmed the gaming industry’s revenue prospects but also restricted any future growth and expansion of the sector.

After a meeting in Bangalore over the weekend, the GoM also went to Goa to understand the operations of Casinos. This was followed by speculation that the GoM has considered the concerns of the industry players and will increase the tax rate to 28% only on the gross gaming revenue (GGR) rather than the full value of consideration which was initially proposed.

As industry experts had pointed out, had the tax rate been on the full value of consideration, it would have crippled the sunrise sector. A change in valuation metric could have a colossal impact on the viability of the business as it would mean an almost 1000% increase. Consumers would lose interest in participation and the market share would suffer greatly. Not only would it deter interest from tax-paying and legitimate gaming operators in the country, but also push users towards illegal offshore sites that contribute nothing to the economy. This is a complex double bind for the online gaming sector which has attracted over $2 billion in FDI and is slated to touch $5 billion by 2025.

The decision from the GoM to tax 28% on GGR, comes in light of careful evaluation of all the operations in the online gaming industry, as well as best practices followed internationally. Denmark and Sweden have been the evangelizers of user-interest and protection when it comes to online means of entertainment. Even other countries like the UK and US have codes of ethics in place that promulgate this space. These countries also follow the practice of taxing on GGR (15-20%) to support the sector’s further expansion. In a similar vein, the government of India is also initiating measures that could help maneuver this space into a safe and transparent operating environment that not only allows it to thrive but also contribute to India’s trillion dollar economy. This establishes the suggestion by the GoM to tax online gaming at 28% on GGR, as a step in the right direction.

A concern for the sector is that taxing gaming in the highest slab also means a 55% increase in taxation, and could be a hiccup for the profitability of gaming businesses. However, this appears to be a carefully thought out suggestion made by the GoM, with user-interest at its nexus. This move would direct more revenue towards the exchequer and benefit the country’s GDP. Given that the online gaming industry also creates a pool of employment opportunities via direct and indirect means, it is essential to allow the sunrise sector to continue shining in order to keep benefitting the upward trend.

The GoM has also taken into account Hon’ble PM Modi’s acknowledgement towards this space and his keen interest in proliferating it to help it scale new heights, as he recently expressed his desire to expand the future of digital technology and open the avenue of gaming for further innovation.

Much like the PM, the GoM recognizes the potential of this sector and its ability to proliferate the Digital India movement, by seeking complete liberation from offshore competition and making India a hub for global gaming. With the gaming user base gearing up to cross 300 million with rapidly rising digital penetration, this move comes just in time to benefit off the collective interest of gamers in the country. This tax rate is promising to the growth of not just the gaming industry but also the overall progress of the country’s economy.