Sunday, March 3, 2024

India deals blow to online gaming industry with 28% tax

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The decision by the GST Council to impose a 28% GST on online gaming in India has sent shockwaves through the country’s burgeoning gaming industry. Widely criticized as a major setback, this move has raised concerns about the future prospects of the industry and its ability to thrive in an increasingly competitive global market.

The decision was based on an interim report prepared by the Group of Ministers who form the GST Council, which recommended applying a 28% GST on the total amount, including the platform fee, for online gaming. Essentially, this means that the GST would be levied on the gross revenue or total prize pool generated by online gaming platforms. However, industry experts and stakeholders argue that this decision is deeply flawed and fails to differentiate between online skill-based gaming and gambling activities. (Flurazepam)

India’s gaming industry has emerged as a sunrise sector, providing employment opportunities for a vast number of young individuals, as well as IT and creative professionals, ranging from streamers and engineers to professional e-athletes. The industry has been growing rapidly, as evidenced by the recently published e4m-GroupM ESP Online Gaming Report 2023, which predicts that the gaming market in India will witness substantial growth, with an estimated increase from Rs 20,800 crore in the fiscal year 2022 to Rs 68,800 crore in the fiscal year 2027, representing a compound annual growth rate (CAGR) of 27%.

With a gaming population that already exceeds 500 million gamers, India is poised to see a further rise in the number of mobile gamers, projected to reach 650 million by 2025. However, despite this impressive growth, the industry has encountered significant challenges along the way. These include the banning of popular Chinese-owned games like PUBG, as well as arbitrary restrictions imposed by state governments, including blanket bans, in an effort to address concerns related to gambling addiction.

The imposition of a 28% GST on online gaming is seen as a severe blow to the industry’s growth potential and viability. Industry leaders and experts argue that such a high tax burden will have catastrophic consequences. They point out that it represents an almost 1000% increase in taxation, effectively strangling the industry’s cash flow and severely limiting companies’ ability to invest in critical areas such as research, innovation, expansion, and even survival.

“It is very unfortunate that when the Central Government has been supporting the industry – in terms of online gaming rules, clarity on TDS, etc., that such a legally untenable decision has been taken, ignoring the views of most GoM states who studied this matter in detail,” said Landers.

Moreover, stakeholders warn that the burden of excessive taxation could have far-reaching negative effects on the gaming economy as a whole. It may deter new players from entering the industry, curtail job creation, and impede economic growth within the sector. They stress that a progressive and supportive GST regime is essential for nurturing the industry’s potential and ensuring its long-term success.

Industry representatives firmly assert that online gaming should be distinguished from gambling, as the former is based on skill and strategy rather than chance. They highlight that the Supreme Court and various High Court decisions have consistently recognized online skill-based games as legitimate business activities protected by the fundamental rights enshrined in the Indian constitution.

“Needless to add, this decision will have a chilling effect on the USD 2.5 billion of FDI already invested by investors and jeopardise potentially any further FDI in the sector. Further, this decision will shift users to illegal betting platforms leading to user risk and loss of revenue for the government,” added Joy Bhattacharjya, Director-General, the Federation of India Fantasy Sports (FIFS).

Furthermore, the consequences of this decision extend beyond the industry itself. Stakeholders argue that it will have a chilling effect on foreign direct investment (FDI), jeopardizing the substantial USD 2.5 billion already invested in the sector. Additionally, they express concerns that such a high tax burden will drive users towards illegal betting platforms, creating risks for users and resulting in a loss of revenue for the government.

Industry leaders and experts are calling on the government to reconsider the decision to impose a 28% GST on online gaming. They emphasize that this move if implemented, would deal a severe blow to India’s ambitious goal of building a 1 trillion dollar digital economy. A more nuanced and supportive approach to taxation is necessary to foster the growth, innovation, and competitiveness of the Indian gaming industry in the global landscape.

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