The Indian government’s recent decision to impose a hefty 28% tax on online gaming

The Indian government’s recent decision to impose a hefty 28% tax on online gaming has sent shockwaves through the booming industry, leaving experts concerned about its very survival. This move, made by the GST Council, has resulted in a sharp decline in the shares of Indian online gaming platforms and casinos.

Previously, the country’s 900+ gaming start-ups were subject to a modest tax on the fees they charged for offering games. However, the introduction of a 28% GST on the full face value of gaming transactions means that the entire amount collected from players will now be subject to taxation.

Industry estimates suggest that the total tax collection on player winnings will surpass 50%, including GST, platform commissions, and income taxes once the new law takes effect. To illustrate the impact, for every $100 spent by a player, $28 will be allocated towards GST, in addition to a $5-15 charge by the gaming platform and a 30% tax deducted at source (TDS) on any winnings received.

This tax burden on players is likely to discourage participation and is a departure from global standards, where value-added tax (VAT) or GST is typically levied at a more moderate rate, and usually only on platform fees or commissions. Sudipta Bhattacharjee, a partner at corporate law firm Khaitan & Co, argues that this sudden move has blindsided the industry, eroding investor confidence and potentially leading to a funding crisis.

The impact of such a significant tax burden extends beyond discouraging players and creating financial hurdles. It also raises concerns about the industry’s ability to attract investments and sustain its rapid growth. The online gaming sector has been a catalyst for innovation, employment, and economic growth in India. Imposing such a heavy tax may stifle its potential, hampering the development of local talent and hindering the establishment of a vibrant esports community.

To ensure the long-term success and prosperity of India’s online gaming industry, it is essential for policymakers to reconsider this decision. A more balanced and sustainable approach can be sought, one that recognizes the industry’s contributions to the economy while addressing legitimate concerns. By fostering an environment that promotes growth, innovation, and responsible gaming practices, India can continue to nurture a thriving online gaming industry that benefits players, developers, and the nation as a whole.

The GST That Could Kill India's Online Gaming Industry

India’s gaming boom

India’s online gaming industry has experienced an incredible surge over the past five years, boasting an impressive annual compounded growth rate of 28-30%. This remarkable expansion has been fueled by the widespread availability of affordable smartphones and inexpensive mobile data, attracting significant foreign direct investment amounting to $2.5 billion, with notable contributions from investors like Tiger Global.

However, the recent decision by the GST council to impose taxes on online gaming is casting doubt on the future growth rates of this thriving industry. Startups operating in this space are expected to be impacted across various aspects, including their user base, revenues, and investor sentiment. Soham Thacker, Founder & CEO of GamerJi, an eSports tournament company, warns that some gaming companies may even choose to relocate their operations outside India to mitigate the impact on investors.

This decision has been met with strong opposition and concern from industry insiders. Gaurav Gaggar, Promoter of Poker High, a poker site, laments that the government has effectively dismantled a multibillion-dollar industry with a single stroke. Moreover, it is feared that the decision may inadvertently bolster the presence of illegal and illegitimate operators in the country.

The All India Gaming Federation has vehemently criticized the move, terming it “unconstitutional, irrational, and egregious.” The federation argues that the government’s decision disregards more than 60 years of established legal precedents by incorrectly associating online skill gaming with gambling activities. While gambling, which relies on chance, is prohibited in many Indian states and carries a negative connotation, most states have permitted online games that are recognized as skill-based.

Tragically, the industry body anticipates the loss of hundreds of thousands of jobs in the online gaming sector as a result of this decision. Currently, gaming startups in India employ 50,000 individuals, and they had ambitious plans to create an additional 350,000 direct jobs and 1,000,000 indirect jobs by 2028.

The implications of this decision extend beyond immediate job losses. It threatens to stifle innovation, hinder technological advancement, and impede the industry’s capacity to contribute to India’s economic growth. The online gaming sector has not only offered employment opportunities but has also become a platform for nurturing talent and boosting entrepreneurship in the country.

In light of these concerns, it is crucial for policymakers to revisit this decision and recognize the potential harm it poses to a burgeoning industry that has become a significant driver of economic activity and employment in India. A more thoughtful and balanced approach, taking into account the unique nature of online gaming and distinguishing it from gambling, would be in the best interest of all stakeholders involved. By fostering a conducive environment for growth and innovation, India can continue to harness the immense potential of its gaming industry while upholding regulatory frameworks that promote responsible gaming practices.

A ‘disastrous’ move

The lack of consistency behind the ruling on the taxation of the gaming industry in India has raised concerns among many gaming companies. Roland Landers, CEO of the All India Gaming Federation, expressed his disappointment, stating that it was unfortunate for such a legally problematic decision to be made despite the government’s previous support for the industry. He also highlighted the potential catastrophic impact on India’s $1 trillion digital economy, which is a key part of Prime Minister Narendra Modi’s vision.

The prime minister himself has recognized the gaming industry as a sunrise sector with immense potential for job creation and global market reach. The imposition of such an extortionate tax regime contradicts these steps and advocacy, necessitating action at various levels to reverse this proposal, according to Sudipta Bhattacharjee, a legal expert.

Bhattacharjee further predicts that if the federal and state governments proceed with enacting these tax laws, the gaming industry will rally together and mount a strong legal challenge. However, the revenue secretary of India has stated that the decision was unanimous and will not be reviewed or rolled back.

This stance by the government leaves the gaming industry in a precarious position. The lack of willingness to reconsider the decision raises concerns about the long-term implications for the industry, its growth, and its ability to contribute to the country’s digital economy. It highlights the need for continued dialogue and advocacy to address the concerns raised by industry stakeholders and work towards a more sustainable and supportive taxation framework.

It is crucial for the government to consider the potential consequences of this decision and engage in a constructive dialogue with the gaming industry. Collaboration and understanding can lead to a resolution that ensures the growth of the gaming sector while also addressing the government’s revenue goals. A balanced approach that considers the unique nature of the industry and fosters its development will ultimately benefit all parties involved.

Ethical Questions

The decision to impose a 28% tax on online gaming in India was announced by Finance Minister Nirmala Sitharaman, who emphasized that the intention was not to kill the industry but to prevent excessive encouragement of such activities when it comes to essential goods and services. According to Siddhartha Iyer, a Supreme Court lawyer advocating for a ban on online gaming, the tax is a “step in the right direction.” Mr. Iyer considers gaming to be a speculative activity and argues that stories of individuals facing severe debts and even taking their own lives due to online gaming highlight the need for stricter measures.

In Mr. Iyer’s opinion, the government’s classification of these games as gambling is accurate since players wager on outcomes that are beyond their control. Drawing a parallel with the taxation of alcohol and cigarettes, he suggests that online gaming should also be subject to higher taxes to discourage participation. On the other hand, Faisal Maqbool, a former gaming addict who personally experienced significant financial loss, believes that even stricter measures are necessary. Mr. Maqbool advocates for a complete ban on these activities, emphasizing their addictive nature and the detrimental impact they can have on children and teenagers.

The viewpoints on the taxation and regulation of online gaming in India are varied, with some supporting the tax as a means to address concerns related to addiction and financial harm, while others argue for stricter measures or a total ban. These differing perspectives underscore the complexity of the issue and the need for a comprehensive approach that considers the potential risks associated with online gaming while also recognizing its economic contributions and the aspirations of a thriving industry. Balancing the interests of players, societal well-being, and the growth of the gaming sector will require careful deliberation and dialogue between stakeholders.

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