Impact Of 28% GST On Online Gaming: Here’s Expert View At Challenges & Opportunities – News18

The 50th GST Council Meeting held on 11th July 2023 made a major announcement in the form of a 28% GST rate on the online gaming sector. While the rate of GST prevailing for casinos was 28% since a long time and the GST Council clarified that the applicability shall be based on the purchase of chips, the recent recommendation of 28% GST to be levied on the full-face value of bets in case of online gaming came as a surprise for the industry.

The online gaming industry has seen positive developments in terms of setting up nodal ministry, viz. the MeitY, applicability of TDS on net winnings, and setting up of AVGC task force. However, the deliberations have suddenly hit a roadblock in the form of a steep GST of 28% on every game, which could significantly impact the prizes that the players can win, and consequently impact the industry in terms of user retention and attracting new users.

Also Read: GST Council To Meet On August 2 On Online Gaming, Casino Rules: Reports

What is the present practice and what is the proposed change?

Presently, a user participating in an online real money game pays an entry fee comprising an amount towards the prize pool (i.e. the amount to be distributed to winners) and a fee retained by gaming platforms as their service charges. GST at the rate of 18% is paid on such service charges (platform fees) retained by the gaming platforms, while there is no tax on the amount contributed towards the prize pool since the game is classified as a game of skill.

The Hon’ble Karnataka High Court recently confirmed non-taxability of the prize pool component, holding that the same amounts to supply of actionable claim outside the purview of GST. The GST authorities are likely to challenge the said decision in higher forums, based on a statement made by the Revenue Secretary in an interview post the 50th GST Council Meeting.

How is it going to impact the users/players?

A simplified illustration of the impact on prize pool is provided below:

As seen from the above, with the proposed change, the GST component has now increased 15 times (from INR 7.2 to INR 112), and the amount left for winners has reduced to INR 248 from the present INR 352.8. This could lead to a potential 30% reduction in prize pool. After further deduction of TDS under income tax on the net winnings in the range of 30%, the amount left with the winner would not be significant enough. This would certainly lead to lower user turnout.

International practice

Internationally, many Governments levy tax on the Gross Gaming Revenue (GGR), which is the service charges retained by the gaming platform. Further, various Governments that were earlier taxing the total entry fee have evaluated and moved towards taxing GGR, citing viability of the industry, grey market operations if the tax component is significantly high, as some of the reasons for the shift in taxation policy regime.

Challenges, opportunities and way forward

The proposal to levy GST at the rate of 28% on the entire amount, though substantive in nature, is being stated by the Government as being merely clarificatory of the legal position that has existed right from 2017, the year of GST implementation. This is likely to face legal challenges, as the imposition of GST at 28% on full amount for the past period was never contemplated by the law.

Prize pool being already paid out to the winners and GST being never contemplated at 28% on the full amount by any online gaming platform for the past, it will be impossible for the industry to pay the entire liability for the past if such demand is indeed legally upheld. Such retrospective amendments will be arbitrary and will set a wrong example to investors on retrospective taxation, especially in the context of the present Government’s commitment not to levy any new retrospective tax, announced in 2014.

The online gaming industry is at a fairly nascent stage, and the recent positive developments by the nodal ministry and under income tax are certain to be undone by the decision of levying 28% on the full value under GST. This not only impacts the industry and investor’s confidence but also the ecosystem that has developed around the gaming sector and the employment that has been generated. The decision to levy 28% GST on full value also has the potential to reverse some of the work done in terms of setting up of AVGC task force, wherein “G” represents Gaming.

The AVGC Task Force Report calls for a National AVGC-XR Mission with budgetary outlay, and recommends a ‘Create in India’ campaign with exclusive focus on content creation in India, for India and for the World, which may possibly not be achieved if the recommendations are implemented. With technology-driven businesses being the centre of focus, it is imperative for the Government to take a decision after considering the progress made so far by other ministries of the Government, and to also consider the best international practices before taking a final call on the taxability.

– Abraham is Partner and Machchhar is Associate Director at Lakshmikumaran and Sridharan Attorneys. Views expressed are personal. 

Disclaimer:The views expressed in this article are those of the author and do not represent the stand of this publication.