A sin tax on online gaming allows the government to sidestep the morality debate

By increasing the cost of so-called sins like crypto trading and online gaming, the government has in recent years turned the whole argument to a purely commercial one. (Photo by Marxua Lomojio via Pexels)

Crypto bros in India must be smirking at the fate that has befallen their counterparts in online gaming. A year after it brought crypto trading under maximal taxation, the government has now levied a 28 percent GST on online games, casinos and horse racing. That's hurting India's 100-million strong community of committed gamers and the several million more who are occasional players.

With this, gaming and casinos join crypto trading, cigarettes and liquor in the category of activities which fall under the dreaded sin tax bracket, also dubbed sumptuary taxes. Their origins go back to the earliest times when they were used to regulate and reinforce social hierarchies and morals through restrictions on who could eat and wear what. Wikipedia tells us that in ancient Rome the censors felt it their duty to keep a check on morals and extravagance in personal and political expenditure and did so by publishing details of offences in the nota censoria, which listed the names of everyone found guilty of a luxurious mode of living including the use of silk by men.

That definition would fit casinos though they are a slightly grey area for the Central government since states like Sikkim and Goa derive a significant share of the revenues from them. Online gaming, on the other hand, is a matter of opinion. The government has chosen not to differentiate between skill-based gaming and gambling.

As with crypto trading, the tax on online gaming comes belatedly on the back of exponential growth of the sector - a 30 percent compound annual growth rate (CAGR) over the last five years leading to an inflow of nearly $2.5 billion in foreign direct investment.

The industry’s reaction to the taxes has been predictably over-the-top with some spokespersons even seeing the move as the death knell of India’s dream of a trillion-dollar digital economy. While that is clearly hyperbolic, their far bigger fear is that the move will drive Indian gamers to offshore gambling websites.

Are such sin taxes effective? A recent report from Bihar states that prohibition has had a salutary effect on households, with women reporting less alcohol-fuelled domestic violence. A ban on cigarettes advertising and the high tax rate on them has led to a reduction in smoking over the years though a counterpoint is that a lot of it has moved to illicit imported cigarettes which are sold without taxes. Clearly, if the objective of the government is to curb the consumption of something that is considered a health hazard, sin taxes do seem to be effective.

But beyond that there is the fundamental issue of differentiating between a vice, which is a personal issue, and a crime which impacts society. Often, though, a vice may lead to a crime. So while, in principle, it seems a matter of personal liberty to allow people to buy and keep firearms for their protection or entertainment, it is well established now that the easy availability of guns is what makes the US the gun-related-violence capital of the world.

Announcing the new tax structure, the finance minister Nirmala Sitharaman made an interesting point: “When discussions on this happened, a state — I don’t want to name anyone — asked if tax on casinos, which are important for tourism revenues in some states, should be lower than the tax on food items. A discussion also took place on the moral question. No one wants to kill an industry, but they can’t be encouraged to such an extent over essential goods and services.”

To be fair, there really is no justification for imposing a lower tax rate on these activities as compared to items of more essential consumption like air-conditioners and dishwashers. The objection though is to the nature of the activity. Online gamers insist they are trying to make money by using their head much as a penny stock picker might when he invests in the stock market. Short term capital gains tax on shares trading incidentally is 15 percent so perhaps the gamers have a point.

Given the polarity of views on the subject, the government may have chosen the safest option. A ban puts it in the position of a guardian of people's morals, a role usually reserved for the church. By increasing the cost of the so-called sins, the government has in recent years turned the whole argument to a purely commercial one. By all means go ahead and play online games or trade in crypto currencies if you must, but the gains must be shared with the taxman.