Insights
Online gaming: The economic case for taxing gross gaming revenues
July 10, 2023The GST Council is poised to meet on July 11 to deliberate (amongst other things) the taxation of online gaming companies. As the Council mulls a higher GST rate of 28 per cent for the online gaming sector, a key open item is whether such GST should apply on the gross gaming revenue (GGR) (i.e., stake amount less winnings) or the entire amounts staked by users.
Globally, the economic benefits of the online gaming industry in the form of investment, taxation, innovation, and employment are well recognized. More particularly, India’s online gaming sector has experienced impressive and sustained growth. Online gaming has been described as India’s next generation of exports and a fillip to the development of India’s digital ecosystem. Admittedly, the industry has been pivotal in catapulting India closer to her ideal of being a global tech hub and cultivating India’s start-up ecosystem. Recent policy changes to regulate the online gaming industry signify government’s recognition of this burgeoning industry and its growing contribution to the economy.
A GST on the entire amounts staked by users coupled with a high tax rate of 28 per cent will impede the growth of this thriving industry and the consequent economic benefits it brings. Burdensome taxation on online gaming will result in declining gaming volumes and may threaten the viability of gaming operators. More importantly, lower gaming volumes may also result in lower tax revenues. Additionally, constant tinkering in the GST regime for online gaming sends mixed signals to the industry and its investors, countering the impact of the recent policy changes. Tech entrepreneurs may also be incentivized to offshore their businesses. As Indian online gaming companies look to capture foreign markets, GST costs will hamper their competitiveness unless there is clarity around exclusion from GST for foreign users playing on an Indian gaming platform.
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Several countries have elected GGR as a tax base as against stake amounts. Key policy reasons cited include industry’s competitiveness vis-à-vis global players, parity with international practices, preventing diversion of user traffic to grey markets and offshoring of domestic businesses, lack of economic logic for taxing stake amounts that are truly pass through, and maintenance of government revenue. Even in the face of purported social costs (keeping the game of skill v. game of chance argument aside), countries have elected a more balanced approach in taxation to foster a sustainable gaming industry for its economic benefits.
Structurally, GST is an ad-valorem tax on goods and services (i.e., a tax on the price or value of goods and services) and is not a unit-based or specific tax. GST on GGR is effectively levied as a proportion of the price charged to users. On the other hand, taxation of a percentage of stakes is inconsistent with the structure of GST. Notably, the price charged to the user by the gaming operator is the platform fee for supply of platform services. Stake amounts are the user’s money held in trust by the gaming operator as a fiduciary. Commercially, as well, GGR is the key metric used by the gaming industry globally to measure performance of a business or contribution to the nation’s GDP. Therefore, a tax base other than GGR for purposes of GST is not grounded on sound economic logic.
As the GST Council sits to decide taxes for the online gaming industry, it is hoped that it will take a balanced and holistic view for the sustainable growth of the industry, consistent with the recent regulatory stance of the Indian Government.
This article was originally published in Financial Express on 10 July 2023 Co-written by: Gouri Puri, Partner; Rajat Bose, Partner. Click here for original article
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Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
Rajat Bose
Partner
