Online Gaming GST: Impact on Online Gaming Companies

Indian Gaming Industry is facing its biggest challenge due to Government’s recent decision of 28% GST for Online Gaming, casinos and horse racing. The Goods and Service Tax Council in its 50^th meeting took this decision.

Government has announced that this decision is not intended to end any industry but the online gaming companies have raised concerns that it will impact the industry and its volumes thus impacting its existence in the market.

But do you really know how big is Gaming Industry in India? Will Government decision of 28% GST on online gaming create major impact on the gaming industry at large?

Well, before proceeding with the topic, let us understand the basic concept first

What is Goods and Service Tax?

Goods and Service Tax (GST) is an indirect tax. It was introduced in the year 2006. It got implemented in the year 2017 and with this the indirect taxation system went through a chain of amendments since its inception. Goods and Service Tax is levied on the final market price of goods and services manufactured internally.
Customers are required to pay this tax on the purchase of goods or services when they pay the final price. The seller then collects the amount and pay it to the government. The GST Rates on different goods and services are uniformly applied across the country.
Goods and services are categorized under different slab rates for tax payment. With GST Government aims to consolidate all indirect taxes levied under one umbrella.

Goods and Service Tax Rates in India

GST RATES	PRODUCTS AND CLASSIFICATION
0.25	Jewellery stones cut and semi-polished
5%	Products listed as items of household necessity like spices, sugar, edible oil, coffee, tea, etc. Sweets, life-saving drugs and coals are also included under this rate slab. Services under this rate are newspaper printing, vessel transport from overseas, fuel-less motor cab renting, AC contract transport services, air transport for pilgrimage, tour operation services, aircraft leasing, ad space in print media, etc.
12%	The rate slab mostly comprises processed food along with computers and accessories. Services include rail transportation of goods in containers via a third party, air travel (exclusive of the economy class), restaurant services (exclusive of liquor licence, AC/heating services, etc.), per day accommodation renting between Rs. 1,000 and Rs. 2,500, building construction for sale, temporary IP rights, hotel accommodation with transaction value between Rs. 1,001 and Rs. 7,500, etc.
18%	The 18% slab rate consists of items like industrial and capital goods along with hair oil, toothpaste, soaps, etc. Services include restaurant services with liquor licence/AC/heating, decoration and catering services outdoors, per day accommodation renting between Rs. 2,500 and Rs. 5,000, hotel accommodation with transaction value over Rs.7, 500, entertainments like a circus, folk dance, etc., works contract supply, etc.
28%	The highest rate slab comprises items of luxury like cars, high-end bikes, consumer durables, etc. along with items like aerated drinks and cigarettes. It covers services like amusement facilities, entertainment events, services of AC 5-star hotels, sporting events, gambling, services of race clubs, etc.

How big is Gaming Industry in India?

The online gaming industry had contributed Rs 4500 crore by the way of taxes. India is the fastest growing market for sports. It is expected to touch 25,240 crore by FY27. Between 2017 and 2020, the country’s industry expanded at a CAGR of 38% compared to 8% in China and 10% in the US. For the past two years, India’s proportion of New Paying Users (NPUs) in gaming has grown at the fastest rate in the world.
Due to the restrictions and lockdown imposed by Covid 19 there were online schools and work from home and the growing popularity of digital payment contributed to increasing demand for online gaming.
Smartphone use has prompted development in the gaming industry. Most games are played on mobile devices. Internet and availability of smart phones with enhanced gaming capabilities have fuelled the market.

Why Government took this decision?

A uniform tax rate of 28% will be applied to the face value of chips purchased in casinos, the full value of bets placed with bookmakers or totalizators in horse racing, and the full value of bets placed in online gaming.
To implement this decision the government will introduce amendments to the GST related laws. These amendments will include online gaming and horse racing in Schedule III as taxable actionable claims. Previously only lottery, betting, and gambling were classified as actionable claims.
The decision was taken as an effort to regulate the industry and ensure fairness and transparency. The government believes that this tax will create a level playing field between online gaming companies and their traditional counterparts.
However the implications of this decision are likely to be far-reaching and will undoubtedly impact the gaming industry as a whole.
The government’s decision also eliminates the distinction between games of skill and chance in the context of online gaming. Previously games that were primarily skill-based were exempt from certain regulations and taxes.
However under the new GST regime, all online gaming activities, regardless of their skill component, will be subject to the 28% tax.

How will the new tax structure be operationalized?

To understand how will the new tax structure work let us take an example :
Suppose the gaming company charges Rs 10 as commission from the players who participates in the contest. If a player deposits Rs 100 the platform earns INR 10. Under the previous tax structure, the 18% GST was applicable. So the GST in this case GST on every INR 100 will be INR 1.8.
However in the new tax structure, the entire face value of the bet or consideration paid will be subject to a 28% percent GST, rather than just the platform fee. This means that for every INR 100 deposited the GST amount will be 28. This is a significant increase in the GST.

Reactions of Online Gaming Companies

Industries have argued that imposing a GST on online gaming will increase the cost for consumers. With the additional tax burden, it is feared that users may be dissuaded from engaging in online gaming activities or opt for offshore platforms that are not subject to such levies.
The government’s decision also eliminates the distinction between games of skill and chance in the context of online gaming. Previously games that were primarily skill-based were exempt from certain taxes. But with this decision all online gaming activities regardless of their skill component will be subject to 28% tax.
Experts believe that Indian players in the gaming industry will face a barrage of notices as a result of new tax. The lack of exceptions in the government’s announcement further adds to the uncertainty and challenges faced by gaming companies.
Many gaming federations have warned of potential job losses and the unintended benefit will lead to illegal offshore gaming platforms, creating an unfavorable scenario for legitimate tax-playing players.

Impact of the GST on FDI’s and Stocks

The decision will severely impact the $ 2.5 billion of FDI already invested and jeopardize potentially any other FDI in the industry.
It could shift the users to illegal betting platforms, leading to user risk and loss of revenue for the government. The higher tax burden will impact company’s cash flows, limiting their ability to invest in innovation, research and business expansion.

Conclusion

By imposing 28% GST on online gaming could have positive and negative impacts. Finance minister Nirmala Sitharaman said that the decision taken were substantive. The minister mentioned that the changes will be made in the GST law. There will be no distinction between games of skills and chance. However the companies are urging the government to rethink its decision considering the ramifications of levying the tax on the overall health of the industry. Companies are of the opinion that government should work with the industry stakeholders to find a more suitable taxation model that supports sustainable growth for the industry.