by Infinilex Consultancy Private Limited (from their LinkedIn post)
At the recently concluded 50th GST Council meeting it was decided that online gaming to be taxed at the uniform rate of 28% on the full value of the bets placed.
Gaming platforms charge an entry fee known as the gross gaming revenue (GGR) from the user to allow them to participate in a particular game. For example, a player spends ₹100, let us peg the GGR at ₹15. Till now, GGR was liable to be taxed at 18% — this implied the operator would have to pay ₹2.7 as taxes. However, the latest provision means that tax will be levied on the entry bet at 28%, taking the taxation amount to ₹28. In effect, for every ₹100 spent by a player, there will be a “sunk cost” of ₹28 towards GST, in addition to a ₹5 -15 charge by the gaming platform and a 30% TDS on any winnings drawn.
The online gaming industry has seen a massive boom in India over the last five years, with an annual compounded growth rate of 28-30%. Driven by easy access to affordable smartphones and cheap mobile data, the sector attracted $2.5bn in FDI. The proposal to charge GST on the full deposit value will reverse the growth trajectory of the industry.
1️⃣ Impact on Gamers 🕹️
With the new rate of 28%, gamers may experience an increase in the cost of in-game purchases, subscriptions, and other related services. This might lead to a shift in consumer preferences. Players may explore alternative forms of entertainment that are not subject to such high tax rates.
2️⃣ Impact on Game Developers: 💻
India has witnessed a surge in homegrown game development studios, fostering innovation and employment opportunities for young talent. However, the increased tax burden could pose challenges for these studios, especially the smaller ones.
3️⃣ Impact on Startups in the Online Gaming Industry:
Startups are the lifeblood of innovation and growth. The higher GST rate may pose a considerable challenge for these startups, especially those operating on tight budgets. It could limit their ability to compete effectively, expand their user base, and sustain operations.
4️⃣ Impact on the Government:💸
While the decision to increase the GST rate on online gaming aims to boost government revenue, higher tax rates could inadvertently encourage users to resort to unauthorised or unregulated platforms, leading to revenue leakage for the government. Further, this decision will encourage illegal offshore gambling operators, drive Indian users to them and ultimately lead to neither optimal tax collection nor the growth of the legitimate industry. The change may inadvertently benefit offshore gambling sites, leading to a significant tax loss for the government and exposing Indian gamers to unregulated offshore gambling websites.
It is crucial to implement appropriate tax compliance mechanism in place for startups in the Indian gaming industry.