India’s online gaming industry wants clarity on taxation

A recent report states that the tax rate should not exceed 20% as it can result in the gaming operators as well as consumers not joining the licensing system.

Online gamers are estimated to grow from 360 million in 2020 to 510 million by 2022, according to a report. (MINT_PRINT)

According to a report by All India Gaming Federation (AIGF) and EY India, the online gaming industry is expected to grow at a compound annual growth rate (CAGR) of 22% by 2023 to $2 billion. This is up from the $906 million in 2019. The online gaming industry is one that's driven largely by the tech-savvy youth and the advent of affordable smartphones and broad internet coverage has made India the fifth largest online gaming market globally. And this is further expected to grow post the digitisation drive we've seen thanks to Covid-19.

The online gaming sector is also the fourth largest sub-sector under media and entertainment. According to the report, online gamers are estimated to grow from 360 million in 2020 to 510 million in 2022 and online real money game players are expected to grow from 80 million in 2020 to 150 million by 2023.

The report further reveals that by creating more than 11,00 jobs, the online gaming industry is estimated to generate around ₹100 billion for economic value for the country between 2021 and 2025 and this comprises of investments, winnings, and in-app purchases. And given the growth prospects of the e-gaming industry, the report also looks into the GST implications and impediments involved that may impact the business operations. As per the report, the tax rate should not exceed 20% as it can result in the gaming operators as well as consumers not joining the licensing system and choosing the grey market instead.

Online games operate on either the “freemium” model or the “rake fee” model. In the “rake fee” model, the gaming platform charges a rake fee to allow you to play the game. The “freemium” model, on the other hand, allows you to play the game for free but additional features need to be paid for. The report states that a rational imposition of Goods and Services Tax (GST) is important for sustaining this industry.

Most countries tax the online gaming industry at or below standard GST/VAT rates and the most common mode of taxing is based on the rake fee earned by industry players in markets like the US, UK, and EU (except in France). In other countries like South Africa, Australia, Singapore, a deemed credit model is followed where the tax is charged on the entire stake value (wagers) while allowing deemed deduction on payouts (winnings) made to players, as Mint reports.

“The valuation disputes under GST law have been a dampener to the industry. It is important to highlight that regressive taxation of these emerging sectors may only make the business unsustainable in India. Our recommendation is that the tax authorities should align their policies with internationally accepted principles of taxing the online gaming sector and provide certainty to the industry," said Roland Landers, chief executive, All India Gaming Federation.

The report also delved into the much-debated topic of legality of online gaming in the country and stated that various high courts have said that games like Rummy, Poker, and Fantasy Sports are skill games and do not amount of betting or gambling. The report adds that e-sports shall also qualify as a game of skill by “applying the principles laid down by the courts”.

“The government needs to unambiguously state and clarify that games of skills such as rummy, fantasy sports, poker, etc., which are different from games of chance such as lottery, betting, and gambling, will be taxed at the normal GST rate of 18% and the taxable value will be the platform fee or rake fee. A clarification to this effect will give certainty to this Industry and foster more investment in this sector,” Bipin Sapra, partner, EY told Mint.