Uniform 28% tax on online gaming: What the GST Council’s decision says, its implications

While the government has maintained that this decision is not intended to end any industry, online gaming companies have raised concerns about the impact of this move on the industry, as it is likely to affect volumes and thus the viability of gaming companies.

What is the decision of the GST Council for online gaming, casinos and horse racing?

The uniform levy of 28 per cent tax will be applicable on the face value of the chips purchased in the case of casinos, on the full value of the bets placed with bookmaker/totalisator in the case of horse racing, and on the full value of the bets placed in case of online gaming.

Earlier, the ministerial panel on online gaming, casinos, horse-racing had discussed the other option of levying tax on gross gaming revenue or platform fee, that is, the charge paid to avail the gaming services, but this did not find favour.

The government will bring in amendments to the GST-related laws to include online gaming and horse racing in Schedule III as taxable actionable claims. In the context of GST, an actionable claim is defined as goods under the Central Goods and Services Tax Act, 2017. It is a claim to an unsecured debt or a claim to any beneficial interest in movable property that is not in the possession of the claimant.

So far, lottery, betting, and gambling were classified as actionable claims. Now, horse racing and online gaming will be added.

The Indian Express learnt that many state finance ministers raised concerns over the growing addiction to online gaming, especially among children, in the Council meeting. The decision to impose a uniform 28 per cent was then taken with consensus of all states.

Union Finance Minister Nirmala Sitharaman, who heads the GST Council, said the intent was not to end any industry but rather a “moral question” about taxing both gaming at the same rate as other “essential items”.

“Our agenda is not to end any industry… all types of businesses have to function… there was discussion on the moral question that on one front, you do not want to end an industry. But that does not mean that you give more incentives to them than essential goods… all states participated in this decision which has been pending for the last 2-3 years. We could take the decision because every state clearly participated in it,” Sitharaman said.

What was the decision by the Group of Ministers (GoM)?

A Group of Ministers (GoM) was constituted to look into the issues related to taxation on casinos, horse racing and online gaming. The GoM submitted its first report in June 2022, which was then discussed in the GST Council in its 47th meeting in June-end last year.

In the first report, the GoM had recommended a uniform 28 per cent rate for casinos, race courses and online gaming on the full value of the consideration paid (contest entry fee/bets pooled/ coins purchased etc.). It had also recommended that no distinction should be made for levying GST on the basis of an activity being a game of skill or of chance or both. After Goa raised reservations on the GoM report in June last year, the Council decided for a review of the report.

Following this, three meetings of the GoM were conducted in July, September and November last year, and the discussions were around two questions: whether the activities of race course and online gaming amount to betting and gambling or not in the context of various High Court and Supreme Court judgments; and how should the supplies of casinos, race courses and online gaming be valued — on the full-face value of bets placed or on Gross Gaming Revenue (GGR) (for casinos), totalisator fee (for race courses) and platform fee/GGR (for online gaming).

Member states had differed on the valuation norms, with West Bengal and Uttar Pradesh favouring tax for all the three activities on the full face value of the consideration paid, while Gujarat had favoured online gaming to be taxed on platform fees. Maharashtra had suggested that these activities as fully taxable and for no differentiation on the basis of the activities being games of skill or chance. Telangana and Tamil Nadu had also supported tax on the full face value.

Goa, however, had suggested that casinos may be taxed on GGR and online gaming may be taxed on platform fees with a rate of 18 per cent. Meghalaya, which is the convenor of the panel, had suggested that casinos may be taxed on GGR. The Group of Ministers, convened by Meghalaya Chief Minister Conrad Sangma, had members from eight states — West Bengal, Uttar Pradesh, Goa, Tamil Nadu, Telangana, Gujarat and Maharashtra.

How will the tax work in real life?

At present, most gaming companies were paying a tax of 18 per cent applicable on the platform fees, distinguishing based on the factor of these activities being games of skill such as fantasy gaming platforms. The Revenue Department, however, has maintained that the tax rate on these categories is 28 per cent and Tuesday’s decision is only a clarification.

To illustrate, let’s assume that the platform fee – the commission the game was charging from a player to participate in a contest – was 10%. So, for every Rs 100 deposited in the game, the platform makes Rs 10. Now, the 18% GST was applicable on the Rs 10. This means that effectively, on every Rs 100, the GST on it was Rs 1.8.

However, under the new structure, a GST of 28% will be applicable on the entire face value of the bet or the consideration paid, and not the platform fee. Meaning that for every Rs 100 deposited, the GST on it will be Rs 28.

In effect, under the new regime, the GST that online games of skill will have to pay will increase by around 15.6 times.

Revenue Secretary Sanjay Malhotra on Tuesday said that GST will be levied at the time of payment for these activities. “For overseas companies providing online gaming facilities here, tax and implementation authorities, payment channels will make the effort to collect the tax because payment is made from here,” he said.

How does the tax interplay with the IT Ministry’s rules for online gaming companies?

In April, the IT Ministry had notified rules for online gaming intermediaries, allowing for the creation of self regulatory bodies that will decide what is a permissible online game.

Sitharaman said the GST Council’s decision focused on the taxation part of online gaming and it will align with the regulation of the Ministry of Electronics and Information Technology (MeitY). She said the tax on online gaming companies would be imposed without making any differentiation based on whether the games required skill or were based on chance, and that there will be an amendment in the GST law to tweak the definition of actionable claim.

“… this is purely on taxation. We will still align with what MeitY wants to bring in as their regulation…there will be an amendment to Schedule III of the GST Act and we will be bringing in online gaming into the actionable claim list where item number 6 clearly says betting, gambling and lottery are already in it. We will be including online gaming and horse racing also into it…therefore they will be taxable on full face value at 28 per cent,” she said.

Who gets impacted?

The decision has been applied indiscriminately to gaming and gambling platforms. This includes companies that have spent years in lobbying efforts to create a distinction between a game of skill and game of chance, essentially trying to distinguish themselves from gambling platforms. As such, online gaming is perhaps the only segment of the internet economy that has multiple highly profitable companies.

Dream11 had a net profit of Rs 143 cr on revenues of Rs 3,841 crore in FY22. Gameskraft—which operates Rummy Culture, Gamezy, Rummy Time, among others—touched Rs 2,112 crore in revenue during FY22 as its profit grew to Rs 937 crore.

However, the GST decision has already started showing an impact on some of these companies. Stocks of Delta Corp – which operates casinos and online gaming platform Adda52 – were down by 22 per cent at the time of publishing. Nazara Technologies, which has said that the impact will be minimal on it, was down by 3.6 per cent.

How big is the online gaming market in India?

The revenue of the Indian mobile gaming industry is expected to exceed $1.5 billion in 2022, and is estimated to reach $5 billion in 2025. The industry in the country grew at a CAGR of 38% between 2017-2020, as opposed to 8% in China and 10% in the US. It is expected to grow at a CAGR of 15% to reach Rs 153 billion in revenue by 2024. India’s percentage of new paying users (NPUs) in gaming has been the fastest growing in the world for two consecutive years, at 40% in 2020 and reaching 50% in 2021.

According to a report by EY and FICCI, transaction-based games’ revenues grew 26% in India, with the number of paying gamers increasing by 17% from 80 million in 2020 to 95 million in 2021.

How have online gaming companies reacted?

From calling the decision “unconstitutional” to suggesting that it will benefit illegal gambling platforms in the country, statements released by online gaming companies showed the deleterious impact they are estimating on their business.

Malay Kumar Shukla, secretary of E-Gaming Federation, which represents Games 24×7 and Junglee Games, said the government’s move was “extremely unfortunate” as it will lead to “a nearly 1000% increase in taxation and prove catastrophic for the industry.”

Roland Landers, chief executive of All India Gaming Federation, a trade body that represents many players including Mobile Premier League, Gameskraft, Paytm First Games, Zupee, Nazara and Rush, alleged that the GST Council’s decision is “unconstitutional, irrational, and egregious”. He added that the decision will wipe out the entire Indian gaming industry and lead to lakhs of job losses and the “only people benefitting from this will be anti-national illegal offshore platforms”.