India's $2-billion online gaming industry jolted by taxing times

The $2 billion online gaming industry in India, while grappling with these issues, the online gaming industry should be treated as entertainment and not gambling, as it comes under the games of skill

Trumped by twin shocks — a Rs 21,000-crore show-cause notice from the Directorate General of GST Intelligence on Gameskraft, and the Tamil Nadu cabinet’s nod to an ordinance seeking a ban — stakeholders in India’s $2-billion online gaming industry are asking for the sector to be treated as entertainment and not gambling.

“News reports suggest that GST authorities may be clubbing online games of skill, which are constitutionally protected businesses, with betting and gambling, which are games of chance. If that is the case, it would disregard more than 60 years of established legal jurisprudence that has been repeatedly reaffirmed by the Supreme Court and high courts,” said Roland Landers, CEO of the All India Gaming Federation.

Sameer Barde, CEO, E-Gaming Federation, pointed out that a Group of Ministers (GoM) was formed to give recommendations for a fair and equitable GST regime for all forms of gaming. “We expect the same to be reasonable and aid in promoting the industry while bolstering tax revenues at the same time.”

The GoM panel is to yet decide on a GST rate for online gaming, horse racing and casinos. It is also considering whether online games of skill should be treated differently from games of chance.

The GoM had earlier recommended a levy of 28 per cent on gross gaming revenue, but it sought more time to submit its final recommendations to the GST Council, Business Standard had reported. The GST Council is expected to meet next month.

“The GoM is already contemplating the method of valuation of supply for GST on online gaming,” Landers said.

Currently, games of skill (that involve no betting) and games of chance are taxed differently. Applying a flat rate across the board would more than double the taxes paid by the industry and force many gaming companies to shut down.

“Online skill gaming companies have been paying tax on platform fees in both the service tax and the current GST regimes. The impact of the different understanding would be that the online skill gaming platforms will have to pay GST, which may be multiple times their revenue,” said Landers.

While the taxation issue heats up, Tamil Nadu has joined the list of states that want to ban online gaming. According to a report by Koan Advisory, around 500 million people play online games in India. Bans on online games with stakes are applicable in three states — Telangana, Andhra Pradesh and Odisha — against whom the industry is fighting a legal battle. The Tamil Nadu government has said that the ordinance will be introduced after Governor R N Ravi clears it.

“We will be able to come up with our views only after knowing what is being written in the ordinance. In terms of revenue to the industry, Maharashtra, Karnataka, Tamil Nadu and Delhi-NCR are the major contributors,” said Barde.

Based on estimates, the global fantasy gaming industry is expected to touch $38.6 billion by 2025. According to industry experts, online gaming in India is growing at a CAGR of 35 per cent.

The industry is looking for a central regulation rather than state-wise guidelines. In May, the Centre had set up a committee to regulate online gaming. The committee included the CEO of NITI Aayog and secretaries of the ministries of home, sports and youth affairs, information and broadcasting and electronics and information technology among others.

“The government cannot enforce a permanent ban on a game of skills according to law, it can regulate it. The government should instead take action against illegal gambling sites operating from offshore and taking customer money without paying taxes. In Telangana, after the ban illegal Chinese companies started operating on a large scale,” said Deepak Gullapalli, founder and CEO, Head Digital Works. According to him, the market in Tamil Nadu is close to Rs 1,000 crore in terms of value.

In June, a committee headed by Justice K Chandru had submitted its report in Tamil Nadu on the effects of online games with stakes on users. The panel not just suggested a ban on them but also on ads that encourage people to play such games. It is not clear whether the current ordinance includes the advertising aspect. The report had highlighted that in the last three years at least 17 people in the state lost their lives to online games.

Though the All India Anna Dravida Munnetra Kazhagam government introduced a legislation banning online games in February 2021, it was struck down by the high court in August that year. The new Dravida Munnetra Kazhagam government then approached the Supreme Court with an appeal in November.

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