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Online Real Money Gaming Gets Equated with Gambling In Taxation

“A tax burden where taxes exceed revenues will not only make the online gaming industry unviable but also boost black-market operators”

In a move set to agitate India’s skill-based online gaming industry, Finance Minister Nirmala Sitharaman announced a 28% GST levy on the total game value for online gaming, horse racing, and casinos yesterday, ultimately equating skill-based online games (non-gambling games) with online games of chance (gambling games) under India’s tax regime. 

Online betting and gambling are currently taxed at 28% GST, while other games are taxed at 18% of gross gaming revenue. The new slab will come into effect once GST laws are amended, Sitharaman added.

“…There is no agenda to finish the online gaming industry,” said Sitharaman yesterday at the 50th GST Council meeting, continuously referring to gambling examples while answering a question on online gaming taxation. “We have to keep all businesses open—take casinos operating in Goa and Sikkim. Both are small states, and argued that these businesses impact our tourism industries. We discussed all of this, and it’s not just our position, every state felt it…[During the discussions a question that was asked was] Can the tax on casinos be less than the tax on food products?…There was a moral question discussed: on the one hand, we shouldn’t shut down the industry, but that doesn’t mean that we give them more incentives than essential goods…”

This conflation sharply departs from the popularised stance that online gaming and gambling are distinct and should be respectively regulated by the centre and states, repeatedly reiterated by no less than India’s Minister of State for IT Rajeev Chandrasekhar over the past few weeks. The same justification was used by the Indian government when it released rules in April regulating (and legitimising) online games. Like the GST Council, the rules also did away with the distinction between games of skill and chance, outlawing games involving wagering instead, a move that the industry has not vocally challenged much.

Legal experts from Tamil Nadu have hinted that the state may challenge the rules in court, as regulating games (whether gambling or otherwise) may fall under the states’ ambit. The rules also surprisingly treat online gaming platforms as intermediaries even though they are typically considered publishers worldwide.

From our archives: “Immediate And Existential Threat To The Entire Gaming Ecosystem”: A Lawyer’s Concerns On Possible Tax Changes

MediaNama’s Editor Nikhil Pahwa says: The effect of 28% GST on online real money gaming/gambling can perhaps be equated with TDS levied on crypto. At the time the crypto regulation came in, there were a large number of Indians from small towns putting small amounts of money into crypto to make higher returns. The TDS took the heat out of the crypto ecosystem to the extent that there was a drastic decrease in transactions and it hasn’t really recovered since. Many crypto founders have even moved out of India. The real money gaming/gambling founders, unlike crypto, have nowhere to go, perhaps except court. 

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How does this ‘play’ out?: In short, the high taxes will shrink winnings, leaving little incentives for users to play, and slowly hurting the industry’s revenues. Here’s how: the GST levy comes after the government’s introduction of 30% TDS on net winnings for online games earlier this year. This means that 28% GST will be levied on the total pool amount levied for a game, 30% TDS on net winnings, and the platform will also charge its own participation fees. So, if two players contribute Rs. 100 each to a pool (making the pot Rs. 200 in total), where the platform charges a 15% participation fee for each user: 

Some questioned whether games purchases from majors like Steam and Epic would be taxed at 28% too:

IT Minister says no difference in approach to online gaming: Responding to an Economic Times report on discussions between the IT and Finance Ministries on their differing approaches to gaming on July 24th, MoS for IT Rajeev Chandrasekhar argued that there were no differences between the two. Adding that the regulatory framework for permissible online gaming was still evolving in India, Chandrasekhar said that the Council’s decision was based on three years of the government’s experience with the sector, including “some bad actors in gaming & online wagering/betting masquerading as gaming.” As the framework stabilises, the IT Ministry will request the Council to reconsider its framework, Chandrasekhar concluded, adding that both ministries were taking a “whole of government” approach to regulating the “challenges and opportunities” of the “digital space”.

The industry is unhappy, says the move will embolden black market: “This is an extremely unfortunate decision as charging a 28% tax on full face value will lead to a nearly 1000% increase in taxation and prove catastrophic for the industry,” said Malay Kumar Shukla, Secretary of the industry body E-Gaming Federation, in a statement to MediaNama

“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,” Shukla continued. “It is in addition to the loss of employment opportunities and the huge impact on marquee investors who are heavily invested in this sunrise sector. Furthermore, online gaming is different from gambling, and the Supreme Court and various High Court decisions have reaffirmed the status of online skill-based games as legitimate business activity protected as a fundamental right under the Indian constitution. While the industry was quite optimistic with the new developments including amendments to the IT rules and implementation of TDS on net winnings, all this will be moot if the industry is not supported by a progressive GST regime. We will wait for further details to assess the situation and evaluate our approach.”

In a statement to MediaNama, Roland Landers, CEO of the All India Gaming Federation said:

“We believe this decision by the GST Council is unconstitutional, irrational, and egregious. The decision ignores over 60 years of settled legal jurisprudence and lumps online skill gaming with gambling activities. This decision will wipe out the entire Indian gaming industry and lead to lakhs of job losses and the only people benefitting from this will be anti-national illegal offshore platforms. It is very unfortunate that when the Central Government has been supporting the industry – in terms of online gaming rules, clarity on TDS, etc that such a legally untenable decision has been taken, ignoring the views of most GoM states who studied this matter in detail. We hope that the Government will reconsider this reccomendation and not implement it, as it will be catastrophic for the 1 trillion dollar digit economy dream of the Hon’ble PM.”

Responding to Rameesh Kailasam, CEO of industry grouping IndiaTech.org, former top IT Ministry bureaucrat Rakesh Maheshwari described the decision as ‘fundamentally flawed’:

BharatPe Founder and Shark Tank judge Ashneer Grover tweeted a eulogy for the industry instead: 

Gaming major Nazara says new tax slab won’t impact revenues: In a BSE filing, Nazara clarified that “this tax, once implemented, will apply only to the skill-based real money gaming segment of our business. The contribution of this segment to our overall consolidated revenues for the financial year FY23 was 5.2%. To the extent required, the Company will proactively take steps to mitigate any potential impact to this segment of our business, and we anticipate minimal impact to our overall revenues.”

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Note: this story was updated at 1:00 pm on 12/7/23 with comments and updates from Nikhil Pahwa, Nazara, AIGF, Rakesh Maheshwari, and tweets questioning the functioning of the tax slab. This story was further updated on 24/7/23 at 1:31 pm to include MoS for IT Rajeev Chandrasekhar’s comments on the differing approaches to regulating online gaming. 

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I'm interested in stories that explore how countries use the law to govern technology—and what this tells us about how they perceive tech and its impacts on society. To chat, for feedback, or to leave a tip: aarathi@medianama.com

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