What is in store for online gaming companies at the GST Council meet?

All online gaming players—big or small, will have to go back to their drawing boards and rethink strategies. But to what extent, depends on the decision of the GST Council in tomorrow’s meeting; Illustration: Chaitanya Dinesh Surpur 

It has been a chaotic few weeks for the online gaming industry.

Three weeks back, during the 50th Goods and Services Tax (GST) Council meeting, Finance Minister Nirmala Sitharaman announced that online gaming, casinos and horse racing will be taxed at a uniform rate of 28 percent—with no distinction between games of skill or chance. For online gaming, the tax is said to be applicable on the “full face value” of bets placed.

The GST Council is set to meet virtually on August 2 to discuss the amendments needed for the same. The industry believes that the council is expected to address matters such as the ambiguity around what ‘full face value’ means, double taxation and many other issues that have been flagged by the industry.

Impact of the 28 percent GST

If an individual puts in Rs100 to enter a contest, of that a certain set percent, for instance 15 percent, is deducted as the platform fee or Gross Gaming Revenue (GGR). The remaining, is given back to the user in the form of prize money. Currently, there is an 18 percent GST that is being levied on that set GGR or platform fee.

Earlier when the GST Council was mulling over this decision, the industry pushed back to either not increase the 18 percent to 28 percent at all, or then increase it to 28 percent GST on the said GGR. However, the decision was not in the industry’s favour.

Sanjay Malhotra, revenue secretary, in an interview with NDTV said that, “the decision on the GST implemented as far as online gaming was concerned, was absolutely unanimous….and a lot of consultation happened prior to that.”

Online skill gaming is currently a $2.5 billion sunrise sector, set to reach $5 billion by 2025. The total number of online gamers grew from 360 million in 2020 to over 420 million in 2023. India’s gaming industry attracted foreign direct investment (FDI) of about $500 million between 2014 and 2020, and over $1.5 billion between January 2021 and June 2022. The industry is growing at an average CAGR of around 30 percent and currently supports lakhs of direct and indirect jobs, and these numbers re likely to grow in the next few years.

While the government is open to discussing how the tax is to be implemented, “One thing is certain,” the revenue secretary added, “that it [GST] will be 28 percent and it will not be on the GGR. It will be on the face value, now whether it will be deposits or at each bet that is yet to be decided.” Keeping this in mind, the industry has gone back to various government bodies with potential solutions.

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

What is a possible middle ground?

One thing is clear, if the GST Council levies the 28 percent GST on Contest Entry Amount (CEA) or every bet, “it will kill everyone. It can also lead to repetitive taxation, for every time someone enters a contest,” says an industry expert, who did not wish to be named. The tax burden will increase by 1100-1500 percent. The expert claims that a similar decision was taken for the gaming industry in Italy and France as well, where tax was levied on the CEA. Soon, once gaming companies started shutting down, the decision was revised.

If the 28 percent GST is implemented on the CEA, Abhishek Malhotra, managing partner, TMT Law Practice says, “there will be massive job losses and eventually businesses could shut. Additionally, players might stop playing on these platforms, since instead of making money post winning, they would potentially lose money.” This is likely to be counterintuitive for a sector that is growing rapidly. He adds, “If an individual finds themselves losing money in these contests, they are bound to move to using offshore betting companies.” In the midst of these discussions, offshore betting companies, such as 1xBet, WinBuzz, Fairplay, known for enticing players with easy money-making options, have added a new element to their bait. “No tax’.

Also read: Influencers collab with offshore betting firms to promote 'No GST' wins

The government, over the last three weeks has been speaking to the industry’s on these issues. Revenue secretary Malhotra added, “The various federations of the gaming industry have met me, we have taken their requests on board, we are deliberating and the decision will be taken by the [GST] Council.”

He reckons, there are pros and cons of both—taxing on deposits at the entry level, or taxing on every bet. But he acknowledged, “As claimed by the gaming industry, the taxation becomes very high in case it is taxed at each and every bet… it is a fact, and it will certainly be taken into account when the final decision on this is taken.”

As the taxation on GGR is out of question, what are the remaining options? The industry is divided on this.

One segment believes that given the situation, the best option is asking for a 28 percent GST on a one-time deposit—which will still lead to a 350 percent increase in GST payout. “This would avoid double taxation and also helps the industry get some clarity,” says an expert. Profitability is bound to take a massive hit for the industry even in this case.

Experts claim that for the next five years, 18 percent GST on GGR will be a Rs40,000 crore tax payout; 28 percent GST on GGR will be a Rs50,000 crore payout and 28 percent GST on deposit might be a Rs70,000 crore payout, which is a Rs30,000 crore increase in GST payout.

“While the ideal situation would be a 28 percent GST on GGR, given that the ministry is not willing to budge, settling for GST on deposit seems to be the only option. This way the industry will have some clarity and move on,” adds another industry source.

The other side of the industry stands by their decision to ask the GST Council to introduce “Net Deposit” or “Net Value” which means deducting the total withdrawals from the total deposits.

“This would be the best alternative and most transparent mechanism to determine the taxable value that would substantially reduce the fatality rate in the sector,” stated a letter sent to the revenue secretary by the All India Gaming Federation (AIGF).

Sources suggest that, “while GST on CEA will definitely kill the industry, they believe that even a 28 percent GST on a one-time deposit is likely to also wipe out about 80-90 percent of the industry, in terms of the numbers. Fantasy sports will survive profitably, but other gaming platforms—the ones who can—will have to go back to day zero to rebuild their products.”

Given how different the models for fantasy sports and other games are, on August 28, a note titled “Over 120 Online Skill Gaming Companies Seek Distinction from Fantasy Sports in GST”, was later withdrawn, after a lot of backlash from fantasy sports players. “The ability to absorb 28 percent on deposits particularly for other games (not fantasy sports), seems very unlikely,” say sources.

In either case, all online gaming players—big or small, will have to go back to their drawing boards and rethink strategies. But to what extent, depends on the decision of the GST Council in tomorrow’s meeting.