When did you last hear about esports and online gaming training centres and enthusiasts aspiring to become ‘pro-players’ in the esports arena? Welcome to the age of esports and online gaming, which has spearheaded growth of countries such as South Korea - an economy that has enormously gained through the development of creative industries including online gaming, recording an average industry growth of 15 per cent in over a decade. Esports and online skill gaming companies in India have raised over $1,500 million in capital investment across 67 deals in 2020 and 2021 alone, according to the data tracker Tracxn. With ecommerce portals and over-the-top (OTT) streaming appsexploring tie-ups with online gaming companies, it is not an exaggeration to suggest that our lives are being ‘gamified’ for the better. Further, as Covid-19 zoomed the number of registered online gamers, with many estimates pegging it at close to 300 million in India, there is a need for a fine-tuned regulatory mechanism to be put in place for facilitating the growth of this segment.

Online gaming skill

In the lead up to the Tokyo Olympics earlier this year, the International Olympic Committee (IOC) organized the first virtual esports summit, which provided great impetus to esports and online gaming. It is understood that the IOC, in order to attract a wider audience, is also considering inclusion of esports as a medal event in the upcoming editions of the Olympics. Further, at the 2022 Asian Games, esports will be a competitive event, with twenty four medals up for grabs. With other sports catching up on this virtual medium, the perpetual bias that was attached to online gaming is slowly waning, and with rapidly expanding internet penetration in India, the degree of acceptability of online gaming for fine tuning our lifestyles will only increase. It is indeed unfortunate that in the online gaming sector, community bias gets amplified with the misplaced concerns of betting and gambling, a tightrope walk that continues unabated in spite of the courts having ruled that online gaming, even when involving real money, is skill-based and therefore, unrelated to betting or gambling.

GST on online platforms

In May 2021, the GST Council instituted a Group of Ministers (GoM) to evaluate the GST levied, inter alia, on online gaming portals. The mandate of this GoM also pertains to examining the issue of valuation of services within the current legal framework as well as suggesting a better formula for valuation. Irrespective of the outcome, the regulations in the context of the online gaming sector are expected to bring in a greater operational clarity. A key challenge in this regard will be delinking tax for the purpose of GST levy and in this regard the business model of the online gaming portals deserves better understanding. In say a certain online game, both players individually pay an entry fee of ₹3, so the platform collects a total of ₹6, which is the total income of the platform for levy of GST.

However, out of the total entry fee collected, the platform gives out ₹5 as the winning reward to a player, while only the balance ₹1 is retained by it as service fee. The online skill gaming industry considers this retained balance as its ‘Gross Gaming Revenue’ (GRR), on which tax should be levied. Unfortunately, owing to lack of understanding of this structure, we are staring at a scenario where the GST may be levied on the entire ₹6, by which the online platform will end up paying tax even on money that was never its revenue in the first place. Pertinently, in other jurisdictions such as Singapore and the United Kingdom, only the GRR is taxed. Whether the GoM will adopt a similar practice or comes up with a new, more nuanced valuation method is to be seen.

Moreover, the GST rate to be levied on online skill gaming will also be keenly watched. Presently, online gaming is taxed at 18 per cent on the commission collected by the platforms for each game. Apart from online gaming, activity such as horse racing is levied a high GST rate of 28 per cent on the total bet value, that is, it includes the amount given out as prize money also. However, in a recent decision on horse racing, the Karnataka High Court had ordered GST to be levied only on the commission earned, and not on the total amount collected, as was the practice. Should the GoM recommend an approach similar to horse racing, it will cripple the rapidly growing online skill gaming sector, consequently crush the investor sentiment, and is unlikely to withstand judicial scrutiny.

In line with the Atma Nirbhar policy, esports and online gaming companies have built successful businesses in a short period of time and the outcome of the GoM would play a definitive role in shaping their future. The outcome of the GoM will also help cement an administrative line between games of skills and betting, and avoid any formulation that puts esports and online gaming at par with lottery or casinos. To encourage participation and expansion of esports in India, the GoM may well consider recommending a lower GST slab than the current 18 per cent.

Any step to accommodate the unique needs of the online gaming industry will require amendment of the current legal framework and the outcome of this GoM is expected to provide not just a workable solution for esports in India, but a new direction to the sunrise sector

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