GST Changes Can Sink the Nodal Ministry and PM’s Vision of India as a Gaming Superpower

February 7, 2023 | Government

INDIA (January 29, 2023) –The Prime Minister has been unequivocal in recognizing the true potential of the gaming industry and envisioned India as a global gaming hub. The Centre has already taken positive steps by appointing MeitY as the nodal ministry for online gaming and proposing progressive draft rules that balance customer interest with industry growth and responsible gaming.

Despite these positive steps, the anticipated decision of the GST Council on two critical issues can either boost or dampen both the MeitY’s efforts as well as the Hon’ble PM’s vision.

Firstly, the GST council is deliberating whether online skill-based games should be taxed at the current 18% or at an increased 28% rate, which is typically reserved for items typically considered ‘sin’ goods like tobacco.

Secondly, the council is also considering taxing skill-based games on the total money received by them while conducting games. This essentially puts online games in the same bucket as gambling and betting – a distinction the MeitY is striving to make.

These changes, if implemented, will have severe implications for this sunrise sector. The industry practice currently is that if a player pays Rs 100, Rs 15 is the service fee charged by the company while the rest (Rs 85) is pooled into a prize pool that is directly distributed to the game-winner. Under current law, GST is payable on the Rs 15 which is the consideration for the service at 18% for skill games, and the prize pool is an actionable claim exempted from GST. The effective net tax is Rs 2.7 in this case.

The levy of GST on the entire Rs 100, that too at 28%, would be an industry killer. The change in effective tax paid on such transactions increases to Rs 28, as opposed to Rs 2.7, which is an approximate 1000% increase. This amount of tax (Rs 28) would be more than the revenue earned by the platform (Rs 15), which would make the business unviable.

Clearly, the industry would be forced to pass on this tremendous cost, which would in turn significantly lower participation, thereby impacting the viability of the industry. Courts have typically frowned upon taxes that are imposed without due consideration of the nexus between the supply of services and the levy of taxation. Further, with the increase in professional gaming, passing on the increased tax could result in impacting the fundamental right of professional gamers to carry on a trade or profession.

Other sound tax policy reasons for preserving and clarifying the existing tax regime is that global experiences (such as in the UK) show that tax revenue increases in the long run and it prevents the formation of grey markets, by keeping taxes at reasonable levels. An optimal tax regime also reduces the allure of illegal offshore and domestic operators.

Already a major contributor to the exchequer with revenue figures of $2 billion, the industry is on a projected path to exceed revenue figures of $5 billion by 2025. The industry also attracts substantial FDI, generates a skilled workforce, and promotes ancillary industries such as cloud computing and fintech. An adverse change in GST could be a major blow to Indian technology-led innovation, putting them at a distinct disadvantage from international peers. We may see Indian companies choosing to operate from abroad, with the result being Indian games being developed, offered, monetised and taxed outside of India. The idea of a ‘Digital India’ could be in harm’s way if the proposed tax regime is adopted for the industry.

This article was first published in Times Of India.

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Author: Meyyappan Nagappan

SOURCE: Trilegal

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