Last week, the Goods and Services Tax (GST) Board released its decision to impose a 28% tax on online gaming, casinos and horse racing, based on full face value. Finance Minister Nirmala Sitharaman stressed that the council does not intend to eliminate any industry, but discussions have been held on the moral implications associated with the online gaming sector.
Sitharaman stated after the meeting, “Our aim is not to wipe out any industry; all types of businesses must operate. There were deliberations on the moral aspect that while we do not want to eliminate an industry, it does not mean that we provide them with more incentives than essential goods. This decision, which has been pending for the last 2 to 3 years, can be taken today because all states have actively participated.”
In accordance with the new tax regulations, GST will apply to the total amount of bets placed or the total amount paid as consideration.
It is noteworthy that Sitharaman clarified that the online gaming tax will be implemented regardless of whether the games are based on skill or luck.
She explained: “We will still follow the regulations proposed by the Ministry of Electronics and Information Technology (MeitY). An amendment will be made to Annex III of the GST Act, including online gaming in the list of actionable claims. Item number 6 on the list already includes betting, gambling and lottery. We will also incorporate online gaming and horse racing into it. Consequently, they will be subject to a 28% tax based on the full face value.”
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Now, this announcement has led to considerable confusion amongst the Indian gaming industry, including companies and individuals – especially over which games will come under the scope of the new announcement and which are actually exempt.
ABP live spoke with Sandeep Chilana, a legal expert in commercial and tax litigation, beverage and gaming law, and managing partner of New Delhi-based Chilana & Chilana Law Offices, to gain clarity on the GST Council’s latest announcement.
P: Could you give us a little bit of background on how the GST decision was made?
Chilana: The GST Council decided that the online gaming industry is responsible for paying the GST not only on the platform fee charged by companies, but also on the total amount contributed by players, ie the full pot.
The GST clarified that the total amount paid by each player to participate in the game (contribution + platform fee) represents an ‘actionable claim’ in the nature of a ‘stake’ and would therefore attract GST.
The Revenue Secretary also clarified that such a decision will be implemented retrospectively.
The government also decided that this tax would be levied at 28 percent.
Previously, the GST Council had formed a committee to make recommendations on the taxation of real money gambling. However, the committee was unable to reach a consensus.
P: Could you explain what kind of online games will be affected by this GST increase? Are there online gaming/esports titles that will be exempt?
Chilana: All games that are played for money, whether by skill or luck, will be affected by this decision. Unfortunately, the government has failed to differentiate between a game of skill and a game of chance.
Cash games not only include games of chance, but also other games of skill such as chess tournaments, DOTA tournaments or other fantasy games involving skill.
P: How will the GST increase from 18% to 28% affect online gamers in India?
Chilana: Currently, the tax burden on the entire transaction is 18% over the platform fee, which is usually 10% of the amount contributed by players, i.e. 1.8%.
However, the impact would change to 28% for the entire pot. This is a substantial increase in the tax cost of the transaction and would considerably reduce the value of the gain, making it less profitable.
What will happen is that in all real money games, the government takes 28% GST on the full pot and 30% income tax on the winnings, which comes to approximately 50%. Also, about 10 percent is the game companies fee, after which the winner gets 40 percent of the total pot value.
P: Expanding on the last question, how will this affect the operation and profitability of game developers?
Chilana: The reduced amount of earnings is likely to make Indian companies less competitive. a survey of online gaming players suggested that 65 per cent were of the opinion that they would stop using Indian gaming companies to play games if the change was implemented.
Gaming companies operating outside of India would benefit unless the tax also applies to these foreign companies.
The reduced number of players will seriously impact profitability and future innovations and investments in the sector.
P: Will game prices and in-game purchases be affected by this change?
Chilana: Game licenses or in-game purchases would not be directly affected by the proposed changes.
The change is only applicable to online games played for real money where players contribute entry fees, a major part of which becomes the prize pool for top players/winners.
P: How will this affect the overall Indian gaming industry on a global scale?
Chilana: Excessive taxation is likely to move online gaming companies abroad along with their innovation and investment.
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