Why Indian online gaming industry needs a GST guideline

By: |
August 12, 2021 3:13 PM

As per the latest EY-AIGF report, the online gaming industry requires regulatory certainty on valuation aspects which will help in catalysing investments and resultantly, economic contribution to the country

Compensation will be the big theme at the next GST Council meeting, but there are other problems with the GST that need to be ironed out to make it more effective.Compensation will be the big theme at the next GST Council meeting, but there are other problems with the GST that need to be ironed out to make it more effective.

The online gaming industry in India was worth $543 million in 2016 and has grown to $1.027 billion in 2020 at a CAGR of 17.3%. The industry is further estimated to reach US$2 billion by 2023 in terms of rake fee earned, according to the latest report by EY in collaboration with the All India Gaming Federation (AIGF). Titled, ‘Online Gaming in India – The GST conundrum,’ the report highlights the potential of the online gaming industry in India and recommends taxation policies based on best global policies levied on the online gaming industry.

Currently, the activity of the online gaming platform to enable gameplays against a rake fee gets covered under the ambit of “supply” under Goods and Services Tax (‘GST’) law. Therefore, GST would be applicable on the revenue accruing to industry players. Since the settled position in law of the online gaming industry has been the classification of games of skill, it falls outside the purview of betting and gambling. However, the industry being in its nascent stage and lack of specific categorisation of online games as game of skill by the government has resulted in ambiguity. The inconsistencies among state laws related to scope of betting and gambling and prohibition of even rummy games in some states has further aided to uncertainty. Due to the valuation prescribed under Rule 31A(3) in CGST Rules and the ambiguity under various state laws related to scope of betting and gambling activities, the revenue authorities have taken divergent views on the taxation of online games. The authorities may take a view to levy GST on the entire stake amount instead of the actual rake fee earned by the platform as consideration for supply of services.

The report highlights that the online gaming industry requires regulatory certainty on valuation aspects which shall go a long way in catalysing investments and resultantly, economic contribution to the country. Therefore, the valuation must be crystallised and clarified. As per the report, the government can confirm GST applicability on rake fee only in line with current industry practice. Alternatively, a deemed credit model can be followed for the purpose of simplicity and ease of verification.

The report also suggests that the government can specifically clarify the rate of GST to be 18% as the online gaming industry acts as a technology enabler and facilitates gameplays through a web platform or application similar to software companies’ products.

“We recommend that either of the above suggestions may be considered by the government. 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 Government shall align its policies with internationally accepted principles of taxing the online gaming sector and
provide certainty to the industry,” the report states.

Read Also: Why Madras HC’s verdict against ‘betting’ games is a game changer

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