Online gaming tax row may end with GST Council move

online gaming
The proposed GST Act amendment could bring major relief to online gaming companies facing huge tax demands.

The GST Council is considering an amendment to the GST Act that could resolve the issue of retrospective taxation for online gaming companies. If the amendment is approved at the meeting scheduled for Saturday, both Union and state authorities will be empowered to waive GST imposed due to unclear regulations or long-standing business customs. This could be a major relief for online gaming companies facing Rs 1.12 trillion in tax demands through over 70 notices. The dues prior to October 1, 2023 may be waived, provided the companies have not paid those taxes. However, any pre-deposits made by these companies will not be refundable.

The proposed amendment to the GST Act is expected to have significant economic implications for the online gaming industry. By potentially waiving the dues prior to October 1, 2023, the amendment could free up substantial capital for online gaming companies, allowing them to reinvest in their operations, innovate, and expand. This financial relief could be especially crucial for smaller and newer entrants to the market, fostering a more competitive environment. The industry’s growth could be further stimulated, contributing to higher employment rates and increased economic activity in related sectors such as technology, marketing, and entertainment.

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The GST Council had previously imposed a 28% tax on the full face value of bets or entry amounts in online games, effective from October 2023. This issue was scheduled for review after six months, ending on March 30. Online gaming companies disputed the government’s demand for back taxes, arguing that the new 28% tax should only be effective from October 1. The government, however, maintains that the revision simply clarifies existing law, making the tax demands non-retroactive. Online gaming companies moved to the Supreme Court, which consolidated several pleas. 

India’s regulatory environment for online gaming appears restrictive compared with international standards. Countries like the United Kingdom have established comprehensive regulatory frameworks that differentiate between types of gaming and gambling, thereby providing clarity and stability to the industry. These countries have also implemented lower tax rates that encourage growth and innovation. By studying and potentially adopting best practices from these international models, India could create a more favourable environment for its online gaming industry, aligning with global standards and attracting more international investment.

The historical context of GST on online gaming reveals a pattern of regulatory challenges. Since the introduction of the 18% GST rate in 2017, online gaming companies have faced ongoing uncertainty. The lack of clear guidelines led to varied interpretations and compliance difficulties, which were compounded by the sudden increase to 28%. This shift not only strained financial resources but also highlighted the need for a more nuanced approach to taxation in this rapidly evolving industry. Understanding this history underscores the importance of the proposed amendment and the need for clear, consistent tax policies moving forward.

The increase from the previous 18% GST rate that online gaming companies had been paying since 2017 created uncertainty, particularly for startups. While this move generated short-term tax revenue for the government, the industry’s long-term viability and its potential to create jobs were jeopardised. Naturally, the sector was displeased.

State of online gaming industry 

India seeks to establish itself as a premier destination for gaming, with Prime Minister Narendra Modi recently meeting with seven of the country’s top gamers, highlighting the government’s willingness to make India a global gaming hub. The government also engaged with the industry to discuss challenges, especially the distinction between skill gaming and gambling (games of chance), which confuses many. The online gaming industry is pivotal to the government’s Digital India initiative.

Between FY20 and FY23, the online gaming industry witnessed a staggering 28% CAGR. This growth trajectory indicates that the sector presents tremendous opportunities. The upward trend is projected to continue, with experts forecasting a market size of Rs 33,243 crore by FY28, fuelledby a steady 15% CAGR. The industry not only attracts significant investments from both domestic and foreign sources but also creates a substantial number of direct and indirect jobs. Given India’s strong IT expertise, the online gaming sector is an obvious area for the nation to excel.

The industry has seen rapid improvements in Animation, VFX, Gaming, Comics, and XR (AVGC & XR), thanks to positive steps taken by the government. The introduction of clear regulations through the IT Rules (2021) has also helped the industry. Additionally, recent clarifications on tax deductions at source (TDS) on winnings have addressed previous ambiguities.

The future of the online gaming industry in India is closely tied to advancements in technology. The integration of artificial intelligence, augmented reality, and virtual reality is set to revolutionise the gaming experience, making it more immersive and interactive. Companies that invest in these technologies are likely to gain a competitive edge. Moreover, the government’s support for innovation through various initiatives can further propel the sector. As these technologies become more mainstream, they could significantly enhance user engagement and expand the market reach of Indian gaming companies.

Despite its impressive growth, the Indian online gaming market currently captures only 1.1% of global online gaming revenue, which surpassed a staggering $300 billion in 2021, larger than the movie and music industries combined. India needs a more conducive and forward-looking regulatory environment to support this burgeoning sector.

The IT Rules of 2021 established self-regulatory bodies for the industry, but their effectiveness is hampered by delays in implementation. The fast-evolving gaming sector needs swift and efficient self-regulation. NITI Aayog’s draft proposal for online fantasy gaming also advocated for a self-regulatory model. MeitY’s self-regulatory proposal for online gaming led to state laws in Tamil Nadu and Karnataka to curb online real money gaming. The government must also strive to define skill-based gaming versus gambling and provide regulatory clarity in the online gaming industry.

India must explore and encourage games based on Indian mythology and the participation of women, besides fostering innovation. Gaming companies should tap into India’s rich cultural heritage, including stories, legends, and folklore, as such games have significant success potential. This is a unique opportunity to cater to both domestic and international audiences.

Industry has highlighted the issue of the perception of gaming as a career in India. The government must work with policymakers to bring about a change in this perception.

Engaging with the broader community and stakeholders is vital for the sustainable growth of the online gaming industry. Building a positive perception of gaming, not just as entertainment but as a viable career and economic contributor, requires ongoing dialogue and collaboration with policymakers, educators, parents, and players. This includes addressing concerns about gaming addiction and ensuring robust measures are in place to protect minors. By fostering a supportive ecosystem, the industry can build trust and legitimacy, paving the way for long-term success.