28 percent GST on online gaming: Industry cites ambiguities even as clarity emerges

Finance Minister Nirmala Sitharaman says the tax on online gaming, casinos and horse racing will be implemented from October 1, but it will be reviewed in six months. Players point out that valuations may take a hit and the new tax regime may compel them to rejig business models

By Naini Thaker Forbes India Staff

Published: Aug 3, 2023 11:58:15 AM IST

Updated: Aug 3, 2023 12:31:07 PM IST

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“Net results in an 8 to 9 percent revenue [GST payout] only. Assuming this 18 percent becomes 28 percent on GGR, even then we will be collecting only around 11 to 12 percent. I’m sorry to say the current collection is far lesser than the tax that we levy for some of the essential goods for households; this is gaming, you're wagering on it," said Finance Minister Nirmala Sitharaman; Image: Shutterstock

During the 51st GST Council meeting on Wednesday, Finance Minister Nirmala Sitharaman announced that the 28 percent GST on online gaming, casinos and horse racing will be implemented by October 1. “The council agreed to come back after six months [beginning from October 1] to review the way in which this is getting implemented,” she added.

During the last meeting, about three weeks ago, it was announced that online gaming, casinos and horse racing will be taxed at a uniform rate of 28 percent on face value. This led to a lot of dissent from the industry due to a lack of clarity on what “face value” meant, particularly for online gaming.

“The Council recommended that the valuation of supply on online gaming and actionable claims in casinos may be done based on the amount paid or payable to or deposited with the supplier by/or on behalf of the player, excluding the amount entered into the games, bets out of winnings of previous games and not on the total value of each bet placed,” Sitharaman clarified during the conference. She explained that when an individual buys chips worth Rs1,000 at a casino, and uses Rs100 out of that as a bet, in case he or she wins Rs300, that winning amount doesn’t get taxed. It is the initial deposit of Rs1,000 that gets the 28 percent GST.

While this makes sense for casinos, how is this expected to work for online gaming? Some industry experts reckon, “It should work similarly for online gaming as well… where if an individual comes to a gaming platform, he or she is charged on the initial deposit. We are glad that we will not be taxed on the Contest Entry Amount (CEA) or every bet. What the GST Council has decided on seems to be a good middle ground to work with.” While withdrawing the winning amount, users anyway have to pay a 30 percent TDS, but with a 28 percent on deposits, the repetition of tax can be avoided.

Also read: Will 28 percent GST kill the online gaming industry?

The Federation of Indian Fantasy Sports (FIFS) & E-Gaming Federation (EGF), which represents 50 Indian online gaming companies, have appreciated the fact that the government has addressed the industry’s concerns on repeat taxation. “The new tax framework, while clarifying and resolving uncertainty, will lead to a very burdensome 350 percent increase in GST and set the Indian online gaming industry back several years. However, it will allow gaming companies a fighting chance to innovate and rebuild the foundation of gaming in India,” they said.

Why the increase in GST?

Currently, there is an 18 percent GST levied on the platform fee or Gross Gaming Revenue (GGR), which Sitharaman explained, “Net results in an 8 to 9 percent revenue [GST payout] only. Assuming this 18 percent becomes 28 percent on GGR, even then we will be collecting only around 11 to 12 percent. I’m sorry to say the current collection is far lesser than the tax that we levy for some of the essential goods for households; this is gaming, you're wagering on it.”

After the announcement, the All India Gaming Federation (AIGF) stated: “Only established and well-entrenched skill gaming companies may be able to scrape through this change by using their existing capital reserves to counter the effects of substantially increased tax liability. However, even their revenues and valuations will significantly fall. Additionally, companies at their early growth stages, particularly those within the startup and the MSME sector, will be disproportionately impacted.”

A majority of the council was in favour of implementing the 28 percent GST, at the earliest. “But the finance minister of Delhi stated that the Group of Ministers (GoM) should review the GST, particularly for the online gaming sector,” said Sitharaman. The finance ministers of Goa and Sikkim—states that are known for casinos—felt the 28 percent GST on face value hurts their interests… although they are in favour of a higher taxation, they want it on GGR, she added. Hence, the decision to review in six months.

The Council also recommended to insert a specific provision in IGST Act, 2017, to provide for liability to pay GST on the supply of online money gaming by a supplier located outside India to a person in India. “Even shifting of base outside India would not help to escape the levy, as the GST Council has decided to bring in GST registration requirements for such offshore companies for the purpose of discharging GST in India. It is evident that the government is firm on its position that online gaming, horse racing and casinos would be treated at par with betting and gambling for the purposes of GST,” says Saket Patawari, executive director, indirect tax, Nexdigm.

The industry is likely to go back many years, and companies are expected to see a massive devaluation as well. “Investors in this sector may continue to be concerned given the ‘blow hot, blow cold’ approach towards online gaming as a sector where on one hand, the sector is lauded and encouraged through ‘light touch’ regulations by the MeITY and on the other, punitive taxation is reaffirmed to be imposed under GST (despite several pleas from the sector) by levying the same level of GST as ‘betting and gambling’ on online games of skill, ignoring decades of settled legal position that games of skill cannot be equated with gambling," says Sudipta Bhattacharjee, partner, Khaitan & Co.

Given how fragmented the industry is smaller players are likely to be impacted more severely. "Taxing GST on Deposits rather than the technology platform commission charged by the companies will make the unit economics unviable, wiping out 80 percent of the industry, with fatality concentrated in MSMEs and Startups that house new age business models. This increase of 400% will solely encourage the rise of monopolistic play," states Saumya Singh Rathore, co-founder, WinZO.

Some Ambiguities

While there will be a massive increase in tax burden for companies—as a result of which the industry remains unhappy even today—some experts reckon “there is some clarity now, after two-and-a-half years”. Some ambiguities, however, still need to be addressed:

1. The finance minister said the states will have to pass their own legislation, subsequent to the Centre. The expectations from legislations passed by each state remain to be seen.

2. For online gaming, particularly, will it be the GST rate which will be reviewed or the valuation methodology… that remains unclear, according to industry experts.

This will be a blow to the industry’s growth. Gaming companies are awaiting details of how the taxing model will work after which each platform will have to go back to the drawing board and rethink its commercial models. Will this change the gaming industry? Probably.