Opinion Arvind Datar writes: With high GST on online games, death by taxes
The policy is based on flawed logic. It is likely to kill an industry that employs a large number of people
The 50th GST Council has now resolved to levy GST at 28 per cent on the aggregate of Rs 1,000. As this is inclusive of GST, the effective tax is Rs 220. (Representational Image) 
Benjamin Franklin famously said that nothing in this world is certain but death and taxes. The decision of the 50th GST Council to levy 28 per cent tax on the gross amount involved in online games is likely to result in an entire industry employing a large number of persons being bludgeoned to death by taxes.
Online games became particularly popular during the pandemic and the industry continued to flourish thereafter, attracting a sizeable amount of foreign investment as well. For over 150 years, the law has made a clear distinction between games of skill and games of chance. In the latter, like a game of roulette, winning is based on pure chance. The lottery is another example of luck or chance determining the winner. These games are in the nature of gambling or wagering. Under section 30 of the Contract Act, 1872, agreements of wager are void and no one can resort to legal proceedings to recover amounts due from games of chance. On the other hand, section 12 of the Public Gambling Act, 1867 states that a game of skill does not amount to gambling. The player with greater skill has a better chance of winning; luck or chance has no role or, at best, a minimal role to play. It is significant that while several Victorian laws were repealed, this law continued to be in force.
Suppose 10 people, playing an online game, deposit Rs 100 each. The gaming company collects 10 per cent as its service fee, i.e., Rs 100, and pays 18 per cent GST on this amount. The balance of Rs.900/- is the amount that can be shared amongst the five winners. Thus, five winners, (say A, B, C, D and E) may get Rs 250, 200, 175, 150, 125 and the remaining five get nothing. No GST is paid on the winnings but the gaming company must further deduct 30 per cent as income tax and the five will get only 70 per cent of what they won.
The 50th GST Council has now resolved to levy GST at 28 per cent on the aggregate of Rs 1,000. As this is inclusive of GST, the effective tax is Rs 220. Of the remaining Rs 780 after this levy, Rs 100 is the service fee, leaving the prize money of just Rs 680. If the same winning ratio is maintained, the amounts won will now be Rs 250, Rs 200, Rs 175 and Rs 55. And these amounts will be further subject to a 30 per cent tax deduction under the Income Tax Act, 1961. Thus, barring the first three, all the others are guaranteed to lose.
Nowhere in the world is tax levied on the entire money that is pooled in online games. The levy of GST is always on the amount charged for the provision of service and this can only be on the platform fee or service charge levied by any gaming company.
The annual collection of GST from online games is estimated to be approximately Rs 2,000 crore, a fraction of the annual GST collection of Rs 15 lakh crore. The Revenue Secretary reportedly claimed that the new rates will result in an increased collection of Rs 17,000 crore to Rs 20,000 crore. This will require online games of over Rs 60,000 crore to be played, which is very unlikely. Similarly, the belief that an increase in tax rates will proportionally increase the tax collected is erroneous. It would be futile to expect income tax collection to double if the tax rate of 35 per cent is increased to 70 per cent.
The serious flaw in our taxation system is the excessive focus on revenue maximisation. Although the GST collection is relatively minimal, the estimated direct employment in this industry is about 100,000 and the indirect employment is twice that figure. It would be unwise to ignore the GST that will be paid by these employees on goods and services that they are bound to consume. A levy of 28 per cent on the entire amount pooled — global practice is to levy VAT only on the platform fee — is bound to only benefit off-shore gaming platforms with all the attendant illegalities. If the decision to levy 28 per cent GST is implemented, the gaming industry is unlikely to survive to any significant extent. The tragedy will be a huge loss of employment with no commensurate increase in revenue. The Ministry of Electronics and Information Technology (MeitY) has also reportedly differed on this issue.
It is equally important for policymakers to examine the collateral consequences of oppressive rates of taxation. Lower rates will result in lower tax collection on an individual product or service, but the increased growth in that industry will more than make up for the loss in taxes. The resultant increase in employment and its overall impact on the economy is perhaps the most critical factor that needs to be considered at this juncture.
The writer is a senior advocate. He had appeared for some of the gaming companies before
the Karnataka High Court
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