Taxation of online gaming has become a become issue in India, which is the world’s biggest market for mobile gaming and has huge employment potential.

India has a strategic advantage thanks to low data prices, robust public digital payments infrastructure and lower entry barriers for mobile gaming, since there are few hardware and software restrictions unlike in PC (personal computer) and console gaming. Therefore, a proper resolution of the issue is important.

The story so far

Recently, the Supreme Court said that all pending matters relating to online gaming across courts would be heard centrally by the apex court. This is a welcome step and gives hope for a pragmatic resolution and improved tax certainty.

Recognising that the AVGC (animation, visual effects, gaming and comics) industry holds huge potential to increase domestic capabilities and boost employment opportunities for the youth, the Government of India constituted an AVGC task force under the Ministry of Information and Broadcasting to recommend relevant initiatives.

In December 2022, the task force submitted its report based on three elements: creating world-class products in India, upskilling and empowering the youth and promoting the segment by providing technology and other incentives.

As far as Real Money Gaming (RMG) segment of gaming is concerned — however, via new tax regulations in July 2023 — the Centre announced it would levy 28 per cent GST on the total game value for online gaming, casinos and horse racing. In other words, skill-based online games were being bracketed with online games of chance under the new tax regime.

As there are more than 400 RMG start-ups, and their revenues account for a hefty 82.8 per cent of the online gaming segment, the revised GST rates will heavily impact these revenues, which are anticipated to drop to 75.4 per cent by FY28.

Moreover, while winnings below ₹10,000 were not liable for TDS (tax deducted at source), this is now applicable to all net winnings. Therefore, OGIs (online game intermediaries) have been ordered to deduct TDS at the rate of 30 per cent from the net winnings of user accounts, either at the end of the financial year or during this year in case of any withdrawal. Due to the revised income tax rules, no prize money income or winnings will be outside the income tax purview. The new rules have thus inflated the tax burden on users and the compliance of OGIs.

The Untapped Potential

Despite the rapid rise of online gaming industry after the pandemic, the domestic online gaming market comprises barely 1.1 per cent of the worldwide online gaming revenues.

Nevertheless, considering its tremendous scope for growth — due to the largely untapped market — online gaming has attracted major investor interest. Since FY20, the segment has seen investments worth ₹22,931 crore, both from national and international investors. Alongside uncertainties in the tax and regulatory regime, however, macroeconomic headwinds of the past year have led to a relative dip in investments.

In FY23, the gaming industry employed around 1,00,000 people — directly and indirectly — across roles, including core and support functions. Earlier, the numbers were expected to reach 2,50,000 employment opportunities by 2025 but higher tax levies are slated to cause a lower rise in job openings.

As the 28 per cent GST came into force from October 1, 2023, the impact was felt almost immediately. Some companies announced layoffs to cut costs while one even went on to announce that the company was quitting its business in India, and smaller entities stopped operations. More companies could soon quit the Indian market as the higher tax burden begins to bite.

Apart from the above, the increase in taxes would also lead to many users shifting to offshore betting and gambling platforms, which are not registered under the GST regime. As these are offshore platforms, there would be virtually no protection for vulnerable Indian users.

Taxing times

The growth of online gaming is under threat today because of the country’s complex and constantly evolving tax landscape. Previously, a clear distinction was always made between games of ‘skill’ and ‘chance’.

The Courts in India have interpreted the terms ‘betting and gambling’ to denote games of chance that come under the Public Gambling Act, 1867, or the State betting and gambling laws. Conversely, games of skill covered via the IT Act, 2000, and Intermediary Rules, 2021, have always been distinguished from gambling and betting by the Courts and, therefore, exempted from the Public Gambling Act rules.

Nonetheless, the amended tax rates run counter to India’s historic indirect tax position as well as international best practices, which cap these rates between 15 per cent and 20 per cent. Accordingly, equating games of skill with betting, gambling or lottery under the tax rules will lead to a classification error.

Additionally, this will trigger major disruption in the industry and its offerings, impacting both the short-term and long-term growth prospects.

(The author is Founder of Rastogi Chambers)