Will the implementation of 28% GST rate put the brakes on online gaming's rapid expansion?

The Goods and Services Tax Council's 50th meeting concluded on July 11. Union Finance Minister Nirmala Sitharaman announced that the council has decided to levy 28 percent on online gaming, among others, on full value, that is, entry fees and winnings.

GST would be levied regardless of a game's skill-based or chance-based nature. The council also debated imposing taxes on the face value of bets, platform fees, or gross gaming revenue, but decided on taxing business turnover. 

With this, if a consumer wants to put in INR 100 on a game, they will only be able to invest INR 72. 28 percent GST is accompanied by existing charges like platform fees, TDS, etc. Hence, the appeal of making "big winnings" with these online games, will subside significantly.

As a sector, online gaming registered a growth rate of 38 percent in FY22, an analysis by KPMG found. The total user base of online gaming is also expected to cross 450 million by 2023, a EY report highlighted.

Many of the campaigns highlight how users can ‘earn big’ by getting onboard. The sizable GST is going to be a big asterisk on that now. Thus, the GST imposition has left a bad taste in the mouth of the industry.

Sitharaman also said that the council does not want to end any industry. They just don't want to give a wrong messaging to the country by lowering the tax rate on such industries to the level of essential goods.

Bhavin Pandya, co-founder and co-CEO, Games24x7, believes that the move contradicts the government's efforts to promote a healthy domestic online gaming sector.

"We are deeply distressed with the GST Council’s decision to implement 28% GST on the Contest Entry Amount (CEA) as opposed to Gross Gaming Revenue, which is the international standard for the sector. The tax on CEA effectively creates a hostile environment for legitimate domestic platforms with an unrealistic tax burden and is counterintuitive to the measures that the government has taken to promote this sunrise sector." 

Gaurav Kapoor, CFO, Baazi Games, says the decision is not inline with the international practice of taxing the Gross Gaming Revenue of the Online Gaming Intermediaries.

"The announcement of levying 28% GST tax rate on the face value is a decision in the reverse direction and will lead to a stunted growth, revenues and investments into the Online Gaming Industry. This development will spur growth in offshore companies and the users increasingly opting to play on illegal platforms," he says.

Siddharth Sharma, SVP- business strategy, Head Digital Works (A23), expresses concern that the move will push users towards illegitimate betting and gambling operators that don't follow the laws of the land.

“The new tax rate of 28% on Gross Gaming Value is an unexpected move by the GST Council, which will have far-reaching consequences for the industry and question its basic viability. Not only will this burden hinder the growth of this nascent industry, its application will compress new innovation and opportunities." 

Mitesh Gangar, co- founder and director, PlayerzPot, says that this taxation will corner the gaming industry in a big way. "The overall operations will not be feasible. The high tax burden will completely restrict the cash flow, limiting a company’s ability to invest in research, innovation, expansion or survival. The higher burden will also put a blocker on India’s massive gaming industry and deter the new player from entering the industry."

Malay Kumar Shukla, secretary, E-Gaming Federation, says the industry's optimism, which was sparked with developments like amendments to the IT rules and implementation of TDS on net winnings, is definitely going to die down with this.

"This is an extremely unfortunate decision as charging a 28% tax on full face value will lead to a nearly 1000% increase in taxation and prove catastrophic for the industry. A tax burden where taxes exceed revenues will not only make the online gaming industry unviable but also boost black-market operators," she adds.

Rohit Agarwal, Founder & Director, Alpha Zegus, concerns over the inclusion of esports being included in the same domain as online gaming, horse racing, and casino. "Esports does not only have a 'win or lose' situation based on luck but has a very big element of skill that determines the outcome of the game. This is not what I expected, and our fight to separate esports from other labels still continues."

Adding to this, Sagar Nair, co-founder and CEO, Qlan (Gamers' Social Network), says, "It can discourage new players from entering the market as their hard earned earnings generated through their efforts just like mainstream athletes will be taxed on the same level as those involved in gambling and other such practices."