GST on online gaming turnover akin to scoring own goal

The last five years, the online gaming industry has grown at 38 percent per annum with annual revenue exceeding $2 billion.

The GST Council in its 50^th meeting on July 11 sounded the death knell of the online gaming industry by recommending the highest slab rate of 28 percent. The Council obliterated the age-old distinction between a game of chance and a game of skill which had been recognised by both the legislature and the judiciary.

The recommendation also comes as a rude shock to the gaming industry, which had recently emerged victorious before the Karnataka High Court. The high court held that games which require superior knowledge and skill even if played online for stakes would also qualify as a ‘game of skill’. These games cannot be compared with betting or gambling, which are a ‘game of chance’ where luck plays the primary role rather than skill.

This legal position had already been settled by the Supreme Court in the cases of Chamarbaugwala (1957) and KR Lakshmanan (1996) that wager or betting on a game of skill does not amount to gambling. In other words, the games of skill would not metamorphose into games of chance merely because they are played for stakes. This position has been followed by different high courts recently in Varun Gumber (Punjab High Court, 2017), Gurdeep Singh Sachar (Bombay High Court, 2019) and Junglee Games (Madras High Court, 2021) wherein challenge to treat online gaming as betting or gambling or seeking a ban or prohibition was repelled on the ground that ‘game of skill’ is protected under Article 19(1)(g) of the Indian Constitution.

Only last year, the prime minister had remarked that the gaming sector has a huge international market and India was exploring to increase its footprints in it. The industry, therefore, expected that the government would strike an appropriate balance between societal concerns and the survival of the industry in its nascent stages. For the last five years, the online gaming industry has grown at 38 percent per annum with annual revenue exceeding $2 billion. The industry has received large FDI inflows, registered over 480 million users and provides enormous employment opportunities. The numbers were only expected to grow further. However, the collateral damage of the GST Council recommendation appears to be insurmountable.

Global practice

Contrary to the global practice, this exorbitant levy of 28 percent is not on the revenue earned by the gaming company but on the pool amount. As they say, the devil lies in the detail. The problem for the industry arises not on account of the rate of tax but the valuation.

The international trend does not support the jarring stance taken by India. Globally, the taxability of the gaming industry falls within two conventional models — the gross gaming revenue (GGR) and turnover tax. The two important features of the GGR model are, one, the measure of tax is on the prize pool minus the winnings distributed to the users — in simple terms, the platform fee charged by the gaming company. Two, the tax levied is a higher percentage. Nations like the United States, the United Kingdom, Australia, Sweden and Singapore are among those that follow this model, though the structure of implementation may vary. On the other hand, the turnover tax model refers to a structure where tax is levied on the contest entry amount. The rate of tax is substantially lower compared to the GGR model. This model is followed by countries such as Germany, Cyprus and Belize.

The GST Council’s recommendations combine the most onerous attributes of both the tax models of levy — a higher tax rate in a turnover tax model setting — to create an extremely unfavourable regime for the industry. The stance of the GST Council seems to be driven by the desire to hamper the growth of the online gaming industry and also reprimand it for the ill effects created on society. What has been ignored is that the unwarranted high tax rates will only motivate the gaming industry to move to more tax-neutral and tax-favourable jurisdictions.

If it is to be considered that the objective of the recommendation is to discourage online gaming from developing societal harms, history shows that such a high-handed regulatory approach has never yielded any fruitful outcome. Consider the regime on the prohibition and regulation of gold and other precious commodities. It appears that India has scored an own goal in this one.

— With inputs from Adhya Manickavelu, Associate, ELP.

Kumar Visalaksh is Partner and Arihant Tater is Principal Associate, ELP. The views are personal, and do not represent the stand of this publication.