India’s Online Gaming Industry Asks for Clarity on Taxation

According to research done by the All India Gaming Federation (AIGF) and EY India, the online gaming sector will expand at a compound annual growth rate (CAGR) of 22% to $2 billion by 2023, up from $906 million in 2019. India is presently the fifth largest online gaming industry in the world, owing mostly to a youthful and tech-savvy population, widespread internet access, and cheaper smartphones with improved performance. This figure is anticipated to rise further as a result of covid-19-induced digitalization.

Online gaming is also the fourth most important sub-sector in the media and entertainment industry. According to the research, the number of online gamers is expected to increase from 360 million in 2020 to 510 million in 2022. While the number of people playing online real money games is anticipated to increase from 80 million in 2020 to 150 million by 2023.

According to the results, the esports industry is expected to produce over $100 billion in economic value for India between 2021 and 2025, including investments, in-app purchases, and prizes, by creating over 11,000 employment.

Further analysis of the report

Given the industry's potential for growth, the report investigates the GST implications and possible roadblocks to the industry's business operations. It was suggested that the tax rate not exceed 20%, since this might lead to gaming operators and customers avoiding the government's licensing system and entering the grey market.

Online games are either based on the ‘rake fee' model, in which the gaming platform charges a rake fee for enabling gameplay, or on the freemium model, in which the gameplay is free but extra features may require the user to pay a monetary cost. According to the research, logical implementation of Goods and Services Tax (‘GST') is critical for the survival of this business.

What is the current situation?

The vast majority of nations tax the online gaming sector at regular GST/VAT rates or lower. The most prevalent kind of taxation is based on the rake charge (platform fee) collected by industry participants in markets such as the United States, the United Kingdom, and the European Union (except France). Some nations (such as South Africa, Singapore, and Australia) use a deemed credit model, in which tax is imposed on the whole stake value (wagers) while allowing a presumed deduction on payout (winnings) given to players.

The valuation issues under GST law, according to Roland Landers, chief executive of the All India Gaming Federation, have been a drag on the sector. It is critical to emphasize that the regressive taxes of these developing industries may only make the business in India unsustainable. They propose that the tax authorities match their regulations with internationally accepted standards of taxing the online gaming business to give the industry confidence.

The article claimed that several high courts throughout the nation have concluded that Rummy, Poker, and Fantasy Sports games are games of skill and do not amount to online gaming, highlighting the highly contested subject of the legality of online gaming in India. By adopting the criteria established by the courts, e-sports will also qualify as a game of skill.

According to Bipin Sapra, partner at EY, the government must state and clarify unequivocally that games of skill such as rummy, fantasy sports, poker, and so on, which are distinct from games of chance such as lottery, betting, and gambling, will be taxed at the standard GST rate of 18 percent, with the taxable value being the platform fee or rake fee. A clarification to this effect will provide stability to the industry and encourage more investment in the area.