In a letter, a lawyer representing gaming firms informed the PMOs office that the additional tax burden can impact revenues and impede projected growth significantly
Industry highlights that it is witnessing a downward trend in the investments which are flowing aplenty into the nascent sector.
Currently, online skill gaming operators pay GST at a rate of 18 % on GGR, wherein GGR is the amount of money that an operator deducts from the total entry fee paid by players for the purpose of playing a specific game.
However, reports state that several states have considered a uniform rate of 28 percent on casinos, race courses, and online gaming with no distinction based on whether an activity is a game of skill or chance or both.
In the event, the incidence of GST liability is increased to the rate of 28%, then this incremental percentage of about 55% shall lead to a burden on the existing operators and shall be in contravention with the existing terms prescribed for GST that can be levied on online skill gaming as the explanatory note to the chapter that pertains to Other Online Content under the Scheme of Classification of Service specifically states –
This service code includes games that are intended to be played on the Internet such as role-playing games (RPGs), strategy games, action games, card games, children’s games; software that is intended to be executed online, except game software; mature theme, sexually explicit content published or broadcast over the Internet including graphics, live feeds, interactive performances and virtual activities.
Also, content provided on web search portals, i.e. extensive databases of Internet addresses and content in an easily searchable format; statistics or other information, including streamed news; other online content not included above such as greeting cards, jokes, cartoons, graphics, maps.”
A majority of games hosted by such online skill game operators fall under the above category.
The industry has requested Exclusion of “Online Gaming” from Sin/Luxury Goods and Services.
Online gaming is being clubbed with casinos and horse riding which can not only be classified as sin goods but is almost exclusively pursued by the elite section of society as opposed to this digital gaming has found a higher uptake amongst users in Tier-2 and Tier-3 cities.
Consumers of online games, however, constitute an entirely different demographic, for whom online gaming is a source of affordable and accessible mode of entertainment. Imposing a 28% tax liability on the companies for provisioning of such services would be tantamount to equating luxury goods with that of products of daily use and will invariably make this otherwise affordable commodity to increase in its value and cost, that is passed on to the end users.
Lack of viability of the increased tax slab and its adverse effect on user retention:
As of now, most of the operators are in a nascent stage of their growth and are rarely profitable. This additional tax burden can further impact on their revenues and impede their projected growth significantly, thereby also witnessing a downward trend in the investments which are flowing into this sector, aplenty. Absorbing this additional cost will further erode the revenue for the operators.
While very few established players may be able to do the same, most others will fall by the wayside. For many of these players, passing the additional cost to its consumers is also not viable. The growth in the broader online gaming space is coming majorly from tier II and tier III cities[1] where consumers are extremely sensitive to costs and any additional burden may rather mean that the operators lose out on consumers as costs become prohibitive for a vast majority of them – which will also impact the reliance on digital payment systems, who have witnessed an increased uptake by these users.
Please note that this is going to be the case irrespective of whether the gross-gaming revenue is taxed at 28% or the deposit amount. While the latter will result in an almost immediate impact, the former will lead to a slow demise of many operators with possibly an exception of a handful of already established and profitable enterprises.
Impact on Foreign Direct Investment
In this post-pandemic world, many of the start-ups across sectors are facing a major funding crunch which has also led to mass lay-offs. As the excess liquidity dries up from the market, particularly driven by rate hikes in the United States, investors are likely to turn even more judicious in their fund allocation and would expect more and more of their portfolio companies to turn profitable. This additional tax burden, at this stage could then make that even more difficult. This could mean a major drop in the FDI as well.
Hazards of other illegal betting platforms outside of India: Given that most of the operators in the industry are start-ups, it is likely that the costs will be pushed to them. It is also well-known that there are several fly-by-night operators in this space which are being operated from outside the jurisdiction of the country and are not amenable to Indian taxation regime.
If a more onerous taxation regime is introduced increasing the costs associated with usage of gaming platforms, such platforms operated by fly-by-night operators will become an attractive spot for the Indian users to move on to, instead of being subject to any higher costs, fees that they may be subject to with Indian platforms.
Any increased cost is likely to push consumers away from such operators which not only means that the growth of domestic players will be stunted but also expose the consumers to several potential fraud and even online harm from such fly-by-night operators. This will consequently result in a significant revenue loss and perhaps an increase in unaccounted monies which could then be used for illegitimate activities detrimental to our nation.
Abhishek Malhotra
Managing Partner, TMT Law Practice
