The online gaming industry in India has gained currency in recent years and has particularly attracted the youths of our country. Given the humongous rise in the need for diverse and challenging games which were essentially accelerated during the pandemic and thereafter, it clearly evidences that online gaming is here to stay. The Indian Olympic Association too has recognised online gaming as a medal event for the Asian Games 2022 which testifies to the fact that online gaming is no longer treated as leisure activity and is at present a sector that has the potential to generate professional athletes, similar to other physical sports.
As with any sunrise sector, the regulation(s) that are applicable to this sector are constantly changing. In a recent move, the Goods and Services Tax Council (hereinafter the ‘GST Council’) in its 50th meeting decided to levy a 28% tax on the full face value of the money deposited or chips bought by the user to play a particular online game. The move seems to aim at embellishing the exchequer with an estimated revenue of INR 20,000 crores annually.
However, this move has failed to take into account the interests of the online gaming industry, with a potential to kill and wipe out the industry which was on multiple occasions regarded by PM Narendra Modi as a sunrise sector which not only has the potential to create jobs but also is capable of catering to the global market.
In the earlier tax regime, we found that there existed a clear distinction between online skill games like esports, puzzles, certain kinds of card games which were charged an 18% GST only on the brokerage fee earned by the online games platform offering such games (i.e. platform fee). This position was however not applicable to games of chance which also included gambling activities at a casino and were subjected to a 28% GST on the total bet value.
While the present regulatory framework takes into account the settled judicial pronouncements distinguishing between games of skill and games of chance, the proposed regime of the GST Council fails to conform to the existing jurisprudence in this regard and intends to wipe off the trite law which distinguishes between games of skill and games of chance by placing both kinds of games on an equal footing. Moreover, taking games of skill at par with games of chance would negate the positive steps taken by the government to establish self-regulatory bodies (hereinafter ‘SRB’), whose primary job is to distinguish between the two. Hence, if the GST Council believes that there is no difference between games of skill and games of chance, then the SRB screening process to differentiate them is rendered infructuous.
Further, the two main models of taxation in the gaming industry are Gross Gaming Revenue Model (hereinafter ‘GGR’) and Contest Entry Amount Model (hereinafter ‘CEA’) or Turnover Tax Model. The GGR model levies tax on the platform fee charged by online gaming platforms. On the other hand, the CEA model taxes the complete prize pool of the players. The government under the proposed regime has followed the CEA model, which would amount to a catastrophe for the industry given that the proposed tax liability would exceed the revenues that can be earned, thereby rendering the online gaming industry unviable. Globally, the gaming industry has shifted from the CEA model to a GGR model. While both the UK and France had previously followed the CEA model. However, as soon as the government realised the threat to the industry, it shifted to the GGR model which has proven quite successful in recent years.
In an ecosystem where the player is being taxed approximately 40-50% (including the 30% income tax) on the total cash/ chip deposits, he would not be able to get a handsome return on investment thereby diluting the platform’s chances of user retention. This would eventually force players to switch to illegal off-shore betting platforms, essentially, the black market operators and disincentivize the legitimate tax-paying players.
However, the government justifies the move by claiming that the decision to impose 28% GST was not intended to kill the industry; rather, it was a moral dilemma that it faced and decided to tax essential commodities at par with online gaming. However, this in our opinion is an entirely flawed logic as the proposed regime mandates 28% GST on the total prize pool of the players thus in a way indirectly condemning them to play any online games that have a play to earn model.
Thus, the need of the hour lies in urging the GST Council to reconsider its decision and it must be revisited primarily from the jurisprudential standpoint which has since the Lakshmanan case and in a catena of judgments in this regard has always been mindful of distinguishing a game of skill from a game of chance. Further, the GST Council must take into consideration the capability of the online gaming industry and how it has acted as a strong source of income for a significant portion of the youth of our country and how this move shall act as a strong blow in deterring fortunes of countless youths. Furthermore, it is also pertinent for the GST Council to note that a large number of marquee investors have invested heavily in this sector given its promising nature which shall amount to a funding winter resulting in the Prime Minister’s dream of making India a digital economy to collapse.
(The writers are from The West Bengal National University of Juridical Sciences, Kolkata)