28% GST on entire entry fees for Online Gaming to kill startups in the emerging sector

• The Indian digital gaming industry is a sunrise sector that has the potential to lead the world’s entertainment and gaming needs. The sector grew at a CAGR of 38% and is expected to be a US $10 billion industry in the next five years.
• There are over 900 startups creating unique and innovative games for the global market. Some of the innovations by online gaming startups have the potential to produce a homegrown social media platform and replace the traditional social media companies like Google, Facebook, etc. that originated from the West. However, these startups are at a very early stage and rarely clock profits
• Penalizing the industry with a 28% tax will send a wrong message to Global Investors as it will be perceived as a lack of support from the government.
• It will lead to few legacy firms capitalizing the market, wiping out innovation-led businesses due to paucity of funds for R&D, and ultimately impairing growth of the sector.
• The Indian gaming industry is estimated to create over one lakh direct and indirect jobs by 2022-23 and approximately two lakh jobs by FY24. Domination of few players and lack of R&D can impair employment opportunities in the sector too.

New Delhi, X May 2023: The Group of Ministers (GoM) for online gaming, casino, and gambling is reportedly considering an amendment in the GST Act, 2017 and bringing the tax rate of online games of skill like chess, carrom etc at par with games of chance such as casinos and gambling. It seeks to increase GST from the current 18% to 28% and also charge the GST on the entire amount received by online gaming platforms as contest fee to participate in multiplayer games like chess, carrom, etc.

So far, the online games of skill industry paid 18% GST on the commission charged by the companies to facilitate gameplay. This commission amount ranges from 10-20% of the contest fee which is actual revenue of the company and is significantly lower than the deliberated value of the entire contest fee. It is noteworthy that pursuant to amendments to the IT Rules, 2021 by Meity, last month, online gaming platforms have been recognized as only ‘online gaming intermediaries’. Hence, for intermediaries, the amount collected towards deposit/entry may not be considered as a service fee of the said intermediaries, and accordingly, GST cannot be levied on the same.

“In the event that the GST Council seeks 28% GST on the contest fee, there is a clear violation of the equality doctrine under Article 14 of the Constitution of India. While the other intermediaries operating under the IT Rules, such as Social Media and OTT are being charged 18% GST on service fee, gaming intermediaries are reported to be deliberated at a much higher GST at 28% on overall contest fee ,” said Abhishek Malhotra, Partner, TMT.

It is also pertinent to note that a higher tax bracket of 28% is consciously made applicable to products that are generally considered “avoidable” (cigarettes, liquor, gambling, etc.) or services that are considered a luxury (luxury hotels, luxury cars, expensive movie tickets, etc.). However, services that are used on a regular basis by a large proportion of the populace, attract 18% or even lower GST rates. Online gaming is an affordable entertainment option for the masses especially in tier II and beyond and priced starting at Re1 per gameplay.

Many legacy fantasy and rummy operators have made representations to the Government indicating acceptance of 28% GST on its commission fee. However, fantasy and rummy is a niche, mature and monopolistic market with profitable companies and represent a small fraction of the online gaming sector. “Most of the 900 gaming ventures in India are at a very early stage and rarely clock profits. The imposition of unsustainable taxation liabilities will dry up the revenues for these companies, lead to domination of few legacy firms, and create huge entry barriers for startups to emerge in the sector. This will kill innovation in the sector. Also, penalizing the industry with high tax rates will send the wrong message to global investors and deter FDI as it will be perceived as a lack of support from the government,” said Malhotra.

India has a growing community of game developers who are creating unique and innovative games for the global market. Some of the innovations by online gaming startups have the potential to produce a homegrown social media platform and replace the traditional social media companies like Google, Facebook, etc. that originated from the West. The industry needs to be nurtured with conducive & friendly policies. The proposed tax regime negatively impacts the sector rather than promoting it.

The Indian digital gaming industry grew at a CAGR of 38% inspite of the recession and is expected to be a US $10 billion industry in the next five years, according to a report by BCG and VC firm Sequoia. The industry has attracted high investments of up to $500 million from overseas and domestic investors in 2022 alone. It is estimated to create over one lakh direct and indirect jobs by 2022-23 and approximately two lakh jobs by FY24, according to a report by TeamLease Digital.