Will 28% GST Kill Online Gaming?

The government’s recent decision to increase the GST on gaming to a flat 28% has sparked off a debate around the structure of the tax regime as well as the rates across categories. Finance Minister Nirmala Sitharaman was at her combative best while stating that gaming deserved peak rates of taxation as it cannot be juxtaposed against vital or essential services. 

Of course, the minister later announced that the GST on gaming companies would be on the total funds deposited to play online games and not on every bet placed. When the government had announced a 28% GST on gaming companies on funds collected on every bet, it shook up the $1.5 billion industry in the country – more specifically the global investors behind it. 

Readers may recall that there are several top investors including Tiger Global that have pumped money into more than 100 gaming companies in India. Reports suggest that it was the collective plea from these moneybags that resulted in the relaxation of the norms. Additionally, it was also noted that imposition of the tax would start from October 1, with no retrospective impact. 

Why Industry wants rates pegged back to 18%

Prior to these announcements, a section of the industry went to town wondering whether they could face a Vodafone-like situation whereby taxes would be levied with retrospective effect. But, the government’s clarification around the topic has taken it off the radar, at least till such time as the current announcement comes up for review in six months. 

Before understanding the impact of this move, let’s look at the key components of the move itself. Online gaming and horse racing are now taxable and the tax rate would be a flat 28%, which is the peak rate. The transaction value for the purposes of taxation would be the full value of the bets placed. 

Earlier, the online gaming business was paying taxes on the commission paid for supplies, which accounts for gross gaming revenue. And the taxes were slotted in at 18%. So, the question that tax experts are asking is since GST is meant to be a tax on value-adds, should it apply on the value-added alone? And, what should be the slab for online gaming? 

For starters, while GST is broadly classified as tax on value-added, the mechanism in place gets implemented by taxing the transaction values and offering credits for the amount paid on purchases. So, in a single tax regime where all economic activity is taxes, such taxes paid by a company is equal to a tax on its own value added. However, this rule breaks if there are multiple tax rates and exemptions. 

Why the rates are what they should be

In the current scenario, the entire fee based on the transaction value is liable to taxes with the games themselves being divided into categories of one that creates a possibility of a payoff on winning and another that does not. In the latter case, the tax should be on charges that the service provider seeks for access to the game. However, in games that involve payoffs, the tax would be on both the commission to access as well as on a part of the winning amount. 

The prevailing multiple tax rates ranging from 5% to 28%, with a special rate of 3% on gold and bullion, means that India has identified goods and services into baskets that could broadly be called vital, essential and desirable. The tax regime seeks to address concerns of regressivity in the regime where vitals can be exempted, essentials carry lower rates vis-a-vis desirables. 

And if one were to add the concept of “sin tax” or goods and services creating a negative impact on society, the tax rates automatically go up. Which is how the government seems to be viewing the online gaming industry. Even the television commercials harp on how gaming could be addictive and needs to be played responsibly. 

And no, online gaming will continue to thrive! 

While the online gaming industry’s call for a reversal to 18% tax is understandable as it falls under the basket of goods and services with a high price elasticity of demand. However, from a policy point of view, a far tax regime with multiple rates needs to tax goods and services clubbed under the “sin goods” category at the same rates. Tobacco is a case in point. 

Given the legal wrangles around online gaming itself and the debate around skills over luck, the government’s move seems in tune with ensuring that activities that are not subject to rational choices should be taxed at a uniform rate. Which brings us to the question we asked up front. Would this hike kill the gaming industry? 

In the absence of empirical evidence that higher taxes would reduce tobacco use, there is no reason to believe that the online gaming industry would be hearing its death knell at this point in time. At best, we will have to wait and see for some time as to how the addicted gamers respond to coughing out more? 

And whether the online gaming industry actually ups the stake so that those playing online games can look forward to hitting a much larger jackpot. Luck and skill, both be damned!