The Goods and Services Tax Council of India has recently declared a uniform turnover tax rate of 28% for online gambling, casino activities, and horse race betting. The confirmation of the commencement date for the GST rate remains undisclosed by the GST authorities, as the implementation of the tax necessitates amendments to the prevailing legislation.
The forthcoming tax adjustment will involve the application of a turnover-based tax on the complete face value of a wager, as opposed to the current practice of taxing gross gaming revenue (GGR). In the context of consumer expenditure, it can be observed that for each unit of Rs100 (£0.93/€1.08/$1.22) disbursed by a consumer, the operator is obligated to remit a sum of Rs28 as tax.
In the context of online gambling in India, it is imperative to acknowledge that taxation shall be imposed upon the complete value of every wager made with operators. In the context of land-based casinos, it is important to note that the imposition of tax shall be applicable solely on the face value of the chips acquired at each respective establishment. Taxation is imposed on the entirety of the wagers made through bookmakers and totalisators in the context of horse racing.
The AIGF has harsh words for the “extremely detrimental” tax rate
The news elicited an adverse response from the All India Gaming Federation (AIGF), the preeminent regulatory entity for the realm of online gambling within the borders of India.
In a statement issued to iGB, it has been indicated by the AIGF that the aforementioned rate will potentially pose challenges for businesses in terms of their sustainability. It has been suggested that such circumstances may potentially result in an increased inclination among players to seek out unlicensed operators.
According to the AIGF, the implementation of this decision is expected to have a significantly negative impact on the Indian gaming industry. The imposition of the Goods and Services Tax (GST) on deposits will result in a substantial increase in liability, ranging from 400% to 500%. Consequently, this development is anticipated to result in the loss of a considerable number of jobs, potentially affecting numerous individuals.
At the current level of taxation, it is projected that companies will incur a higher tax burden compared to their generated revenue. It has been observed that individuals who engage in gaming activities may, unintentionally, gravitate towards gray market operators operating illicitly within the jurisdiction of India.
The potential consequences of this action include the suppression of competition, the hindrance of innovation, and the limitation of industry growth. It is important to note that the Council recommendation, if implemented, may disproportionately affect a significant number of micro, small, and medium enterprises (MSMEs) as well as startups. The circumstances they face may present significant difficulties in their ability to sustain themselves.
And it all started out so well
As per a report released by the eSports Players Welfare Association (EPWA) and Vinayaka Mission’s Law School (VMLS), it has been observed that the population of individuals engaged in online gaming has experienced a growth of 12 percent, reaching a total of 507 million during the fiscal year 2022, in comparison to the previous fiscal year’s count of 450 million.
According to experts, the expansion of the internet, the affordability of data, and the emphasis on domestic production of mobile phones have contributed significantly to the strengthening of this sector. India, characterized by its substantial demographic of youthful individuals, has emerged as a prominent market for the realm of online gaming. Games such as rummy, poker, and fantasy sports have gained significant popularity within the nation.
According to a report released by Deloitte in collaboration with the Federation of Indian Fantasy Sports (FIFS), it has been revealed that the online gaming industry has experienced significant growth. In the fiscal year 2022, the industry reached a value of $2.6 billion and is projected to expand further to $8.6 billion by the fiscal year 2027. This growth is anticipated to occur at a compound annual growth rate (CAGR) of 27 percent. According to experts, the current valuation has reached a significant milestone of $3 billion within the present year.
This is not the first time tax rates have been the subject of controversy
The tax question has been a matter of concern within the online gaming industry for a considerable duration. Games of chance and gambling were previously subjected to a 28% Goods and Services Tax (GST) on the value of the bet. Conversely, games of skill were subject to an 18% GST on the platform fee or gross gaming revenue (GGR).
However, it is worth mentioning that professionals have consistently highlighted the subject of both the rate and value as a topic of ongoing discussion and analysis. The contention put forth by the industry revolves around the proposition that the platform fee, a universally recognized concept, should be given due consideration.
The determination of what constitutes a game of skill versus a game of chance has been a subject of dispute, and it is widely believed that the issuance of previous tax notices stemmed from this very matter. The GST rate pertaining to the gaming industry has been a topic of considerable discussion due to the contrasting tax differentials of 18 percent and 28 percent imposed on games categorized as skill-based and chance-based, respectively.
According to Saurabh Agarwal, a Tax Partner at consultancy EY, it has been observed that the classification of a game based on factors such as skill, luck, or chance has been a matter of subjectivity and has consequently led to legal disputes.
The industry has been significantly impacted by the implementation of a 28% GST on deposits made in wallets or the total value of bets placed at the entry level for online gaming or in casinos (excluding winnings utilized for subsequent bets) starting from October 1st. The aforementioned statement pertains to any virtual gaming platform that encompasses financial transactions, regardless of its classification as a game of skill or chance. It has been duly communicated by the Central Board of Indirect Taxes and Customs.
The manifestation of the impact is presently discernible. According to reports, MPL has announced a significant reduction in its workforce, affecting approximately 50% of its employees. In an internal communication, the co-founders, Srinivas and Malhotra, expressed that the implementation of the new regulations will result in an escalated tax burden. Consequently, they stated the necessity to make “difficult choices” in response to this situation. Furthermore, they indicated that the burden is projected to rise significantly, potentially reaching a range of 350-400 percent.
Based on a significant number of start-up entrepreneurs, the imposition of taxes is anticipated to pose challenges and hinder the progress of the industry. In light of the circumstances, it appears that the feasibility of operations is significantly compromised. According to Mitesh Gangar, Co-founder and Director of fantasy gaming firm PlayerzPot, the imposition of a high tax burden will significantly impede the inflow and outflow of cash, thereby constraining a company’s capacity to allocate resources towards research, innovation, expansion, or even its very sustenance.
How to Stay Alive
In the current landscape, it is observed that online gaming unicorns have adopted a stance of cautious observation and anticipation. The Co-founder & Co-CEO of Games24x7, Mr. Thampy, has expressed that his company is currently directing its attention towards the process of re-pivoting and rethinking its strategies.
The concept of re-pivoting involves the diligent examination and comprehension of information through a data-centric methodology, while simultaneously considering the reactions and behaviors of individuals in response to this particular tax.
As per an undisclosed high-ranking official from a prominent gaming company in India, it is anticipated that the current count of real-money gamers, which stands at approximately 120 million, may witness a decline exceeding 50%.
The current economic climate has prompted smaller companies to suspend their business plans or cease operations altogether. Conversely, larger companies are actively seeking ways to maintain their operations and minimize the repercussions, often resorting to measures such as workforce reductions.
Investments in the sector have been adversely affected, leading to uncertainties regarding short-term viability, as stated by Zerah Gonsalves, a former executive overseeing Esports Operations at D11 Gaming, headquartered in Bahrain, and currently serving as a Player Representative at EPWA.
Based on the speaker, it has been observed that certain firms are currently engaged in the development of strategies aimed at maintaining their player base. Conversely, there are also firms that are contemplating the adoption of diversification as a means to ensure their own sustainability.
There are considerations being made by certain firms to relocate their operations to foreign countries. Ahuja, in his statement, acknowledges his active engagement in observing the circumstances. He expresses uncertainty regarding the potential impact of the government’s commitment to reassess the situation after a period of six months.
The gaming industry is characterized by its borderless nature and its reliance on innovation. It is worth noting that India’s current market share in this industry stands at a modest 1 percent of the global market.
It is worth noting that the United States and China make contributions of 23 percent and 25 percent, respectively. According to Amrit Kiran Singh, the President of Skill Online Games Institute, an industry initiative focused on consolidating industry-related information, India’s potential to attain a 5-10 per cent global market share is feasible, unless impeded by burdensome regulation and excessive taxation.
The Path Forward
As the evaluation of the outcome is still pending, it is evident that the stakeholders continue to exhibit divergent perspectives. It is widely acknowledged by experts that the industry may potentially experience a similar outcome as crypto assets, although there are differing opinions suggesting that this does not signify the ultimate conclusion. Based on a spokesperson from Dream11, it is worth noting that India currently holds a prominent position among the global fantasy sports markets in terms of user base.
The company remains committed to ongoing technological advancements aimed at revolutionizing the sports engagement of Indian enthusiasts. The immense potential of this industry, coupled with the unwavering passion exhibited by fans, serves as a source of optimism for Dream11.
Based on Thampy of Games24x7, it has been suggested that the industry expresses a desire to reach a compromise with the government, all the while advocating for the implementation of a tax on Gross Gaming Revenue (GGR).
According to tax authorities, the responsibility for paying the Goods and Services Tax (GST) lies with the player rather than the firm. According to an official, if individuals maintain their interest, it is highly likely that they will assume the responsibility and engage in the activity.
Ahuja’s immediate future appears to be characterized by a sense of bleakness. The certainty regarding the setting of the sun on this sector remains undetermined at present.