Online Gaming’s Tax Paradox

With about Rs 1.5 trillion in tax demand for 2017-2022, the fast-growing online gaming industry has woken up with a shock after the Goods and Services Tax (GST) Council decided to bring in a 28 per cent tax on online gaming recently.

Even though the tax authorities have been reiterating from time to time that online gaming is similar to betting and attracts 28 per cent GST, the gaming firms did not comply claiming that theirs are games of skill which attract 18 per cent tax on the platform fee (typically around 10 per cent of the entire gaming amount). This translated to around 2 per cent tax on the full gaming amount. The GST Council, the apex decision-making body consisting of the Central government and all state governments, wondered how is it justified that activities akin to gambling attract just 2 per cent tax while entertainment activities attract 18 per cent tax.

In its 50th meeting on July 11 this year, the Council decided to legally clarify that a 28 per cent tax applied to online gaming, a move that rattled the gaming industry. Following representation from the industry, the Council in its 51st meeting on August 2 decided to exempt redeployment of the winnings from online gaming or bets out of previous bets, in a significant relaxation for the fast-growing gaming industry.

The Council also recommended that valuation of the supply of online gaming 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 games/ bets out of winnings of previous games/ bets) and not on the total value of each bet placed.

In other words, GST will apply to only the initial amount deposited for gaming activities, not on each bet placed out of the initial deposit or from winnings from previous bets. However, this relaxation is prospective.

All the old cases prior to the GST Council’s decision could still be taxed at 28 per cent on each bet even if it is taxed earlier at the entry level or bets placed out of winnings in the games.

For example, if a player deposited Rs 100 in her wallet, she was supposed to be taxed at 28 per cent and again liable to pay the tax subsequently on bets placed out of that initial deposit or from winnings from previous bets.

This made tax incidence very high due to taxation at multiple levels, which was rightly corrected by the Council for prospective gaming activities.

The online gaming industry, which is already litigating to continue with an 18 per cent tax on platform fees (about 2 per cent tax on total value), found itself at the receiving end when tax authorities flooded them with tax demand notices to the tune of around Rs 1.5 trillion for 2017-2022 period.

After the Supreme Court stayed the Karnataka High Court’s judgment last month that quashed the Rs 21,000 crore tax notice to GamesKraft, the tax authorities were in a hurry to send notices in all the old cases.

The tax authorities’ hand was forced by the time bar provision in the law that would have made it impossible for them to send notices in many old cases after December this year.

Another plausible explanation is that to avoid mudslinging later, the government would rather welcome a court judgment to settle the matter to the satisfaction of all to bring a curtain on the case.

Since the matter is heavily litigated, the government is also conscious of the fact that the tax demand may see a sharp fall if the Supreme Court holds that the past cases would also get the benefit of clarity on taxation provided by the Council recently. Basically, that could bring the old cases and new cases at par for taxation. If that happens, the tax liability may be just one-fourth of Rs 1.5 trillion.

In the interest of everybody including the society which believes that online gaming is a bad influence on the youth and a major reason for suicides and crimes now, there needs no leniency in taxation. So, it may be time the online gaming industry also accepts the changed goalpost and collects a 28 per cent tax from gamers at the entry-level. This is a reality as changes have been made in the GST laws recently by the Parliament and state assemblies. Gaming firms, a large chunk of whom operate from overseas, can no longer harp on collecting just 2 per cent tax (18 per cent on 10 per cent platform fee) on gaming amount.

All demerit goods such as cigarettes and gambling under the previous value-added tax (VAT) regime and the current GST regime attracted the highest slab of tax. Yet, those industries survived and flourished. So, the fears expressed by the online gaming industry that the tech-heavy industry will die due to higher taxation is far from the truth.

Even as expectations build up that the courts may give relief to gaming companies in the old cases that face higher taxation, the government has also pledged to review the taxation matter after six months.

The government, which wants to ensure that the right taxes are paid, is not oblivious to the genuine problems faced by the industry, even if it is not something they don’t want to promote.

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