GST on deposit versus net deposit: Skill gaming industry divided on taxation

The skill gaming industry is divided over taxation. The meeting of GST Council is scheduled on August 2 on mechanism of levying GST on online gaming.

The GST Council is set to meet on August 2 to discuss a mechanism to impose 28 percent GST on online gaming. The skill gaming industry, meanwhile, remains divided over the levy.

Some firms are in favour of being taxed on deposits, while other companies say this is not viable and want GST imposed on net deposits.

The gaming platforms so far have been paying 18 percent GST on platform fees or gross gaming revenue (GGR). In the last meeting, GST Council had decided to levy 28 percent GST on full face value.

The skill gaming industry has said that tax on full face value will kill the industry and proposed GST at 28 percent on GGR. But due to the uncertainty around the acceptance of this proposal by the GST Council, the industry has suggested to either consider net deposit or deposit.

Deposit here refers to the amount added by a user to his/her wallet on a gaming platform. Face value which is also referred to as full bet value or contest entry amount (CEA) means that every time you play a game you will have to pay GST on that entry amount. While deposit is when you load money in a wallet GST is paid at that stage.

There are also players who feel that neither net deposit nor gross gaming revenue (GGR) will be considered (by the GST Council), said the founder of a gaming firm.

“So, they are recommending deposits. They have a feeling that the current GST on face value will continue, so they are advocating for (tax on) deposits.”

“If GST is levied on deposits, 80-85 percent of gaming companies will die. Companies that are sitting on a large capital pool and can remodel their businesses, and those that offer large tournaments, will be able to survive. That will be 10-15 percent of the businesses in the gaming industry," the founder said.

The All India Gaming Federation (AIGF) has said that the ideal valuation methodology for the levy of goods and services tax (GST) at 28 percent will be on platform fees or GGR. However, according to the gaming industry the GST Council is not likely to give GGR a rethink but may consider a GST on deposits. “In the case of deposits, we have suggested considering net deposits, which would be 70-100 percent higher from the current tax levels but will still ensure there is no multiple taxation," the federation said.

Tax on net deposit is a win for all

Net deposit means the number of deposits made in a given period minus the number of withdrawals. “Net deposits will broadly equate to gross gaming revenue (GGR), or platform fees,” said the founder cited above.

A senior executive at a major gaming platform explained how GST will be levied on net deposits. “A user has deposited Rs 1,000 in a wallet and uses the money to play games and then wins Rs 800, which s/he withdraws. This money, when deducted from deposit, will leave the platform with Rs 200 on which the 28 percent GST will be levied and the gaming platform will pay Rs 56 as GST."

Taking the same example, GST on deposit will be Rs 280. In case of GGR, if a platform charges 20 percent as platform fees on bet value which comes to about Rs 200 then 28 percent GST will be charged on Rs 200 at Rs 56.

For face value or contest entry amount, GST at 28 percent will be first deducted on Rs 1,000 deposited in an account which will be Rs 280. When this amount is entirely used to play a grand contest (large tournament) then GST will be Rs 280. However, if the money is used to play smaller games like chess or ludo and the user takes Rs 200 out of the Rs 1,000 on which s/he has already paid 28 percent GST at Rs 280 the user again has to pay 28 percent GST on the Rs 200 at Rs 56. And this results in repetitive taxation.

Net deposit getting taxed will mean more transparency as there will be reliance on third-party payment gateways; even at a user level people can track it and the business of the gaming firms will not really get impacted, the founder said.

However, Jay Sayta, a technology and gaming lawyer, said that the recommendation for GST on net deposits does not make sense. “If GGR is rejected then why will net deposit be accepted?”

GST on deposits will wipe out small firms

Due to the uncertainty around acceptance of GST on net deposits, there is a segment within the gaming industry that has recommended tax on deposits.

“GST on deposits will mean 400-500 percent increase over 18 percent GST on the platform fees and that is quite high for most of MSME (Micro, Small and Medium Enterprises). The larger players will take a significant hit but still can survive,” an AIGF representative said.

In case of 28 percent GST on deposits, the prize pool will get smaller and will lead to erosion of users, especially for platforms that offer quick, continuous games such as chess and ludo, among others. On the other hand, platforms offering large tournaments will make some money as the prize is bigger.

User setback

If GST is levied on deposits, the problem will arise in terms of user behaviour, said the AIGF. “Some players may reduce their frequency to play games, which will affect the gaming revenues of companies. It could also make the gaming experience less straightforward and less attractive for some players, leading to a potential decline in user engagement,” said Rajesh Pandey, Founder of MyMaster11, an online gaming platform.

Some players are looking to divert to offshore sites because of the GST levy, noted an AIGF representative.

“There will be a drop in the prize pool shared with the winners due to GST on deposits. This could encourage the players to approach gaming platforms in other countries that have better taxation models and thereby larger prize pools,” added Sanjay Chhabria, Director, Indirect Tax, Nexdigm, a financing advisory firm.

Uncertainty continues

Any alternative on valuation, whether on entry fees or deposits, will severely impact the industry across the spectrum, along with 40 crore Indian gamers, said the E-Gaming Federation (EGF).

But the industry thinks that there is a likelihood of GST on deposits. “Maybe in the long run, after seeing the negative impact of tax on deposits, the government may relook at it,” an AIGF representative said.

With inputs from Vikas