Billion-dollar online gaming industry seeks clarity on valuation, taxation

India is the fifth largest market for online gaming, a billion-dollar industry that could double to $2 billion in the country by 2023. However, perception of online gaming hasn’t always been favourable and policies, too, have at times worked against the sector.

For instance, Tamil Nadu had recently made an amendment to the Tamil Nadu Gaming Act to ban pla­ying of online betting games like rummy and poker with stakes. The Madras High Cou­rt struck down, tho­u­gh, earlier this month.

The industry has now come out with a report to make a case for itself, and put forth the matter of taxing the business. Given the contrib­ution to ec­onomic de­v­elop­m­ent and job creation that are at stake, an alignment of the government’s policies with internationally accepted practices of taxing online gaming is necessary, it says.

The report, titled “Online Gaming in India — The GST conundrum”, released by Ernst & Young (EY) with the All India Gaming Federation (AIGF), analyses the implications of the goods and services tax and hurdles that may impact the industry. Online gaming globally is estimated to grow from $38 billion in 2019 to $122 billion by 2025. The industry offers players several formats including fantasy sports, casual games, e-sports (competitive skill-based), educational gaming and card-based games (rummy and poker).

In May, the GST Council set up a group of ministers to look into the valuation of taxable services offered by online gaming firms. The group is set to submit recomm­endations to the panel within six months.

“The very fact that online skill gaming has been considered for GST valuation by the tax authorities is proof that we’ve done a lot of work in the past three-and-a-half years,” says Roland Landers, chief executive officer of AIGF.

The report notes that online games op­erate either on the “rake fee” model, wherein the gaming platform charges a rake fee for facilitating the games, or “freemium” models where the game play is free but additional feat­ures may require users to purchase certain items.

Two taxation models are prominent. First, tax is levied only on the rake fees ear­ned by the gaming service pro­vider, a practice followed in all EU nations (except France), UK and US. Sec­ond is the deemed credit model followed by the likes of Australia, Sin­ga­pore and South Africa. It provides for levying tax at standard rate on the en­tire stake value and si­multaneously allows dee­med credit of the tax paid on the amount distributed to the players.

The report recommends that valuation must be clarified, with either confirmation of GST applicability on rake fee in line with industry practice or by following the deemed credit model.

Utkarsh Sanghvi, partner, EY India, says since it’s a sunrise industry, there is confusion within the tax department and an inherent mindset that equates a game of skill with a game of chance like ga­m­b­ling and betting. Overall, service prov­id­ers are already adopting the rake fee mod­el in India, he says.”

Sanghvi says that gaming is attracting the most number of deals in media and entertainment. Among big players are Dream11, the first Indian gaming firm to become a unicorn and title sponsor of Indian Premier League 2020, Zupee and e-sports platform Mobile Premier League. Clarity on valuation and taxation will, he adds, help in getting better valuation of companies and investments.