The clarification by the Goods and Services Tax (GST) council on Wednesday that the 28% tax will not be levied on every subsequent contest, but only on the entry-level amount deposited by the gamers on the online platform to play games, may bring some respite to bigger gaming companies.
However, the same will not be the case for smaller startups and firms which will continue to face the possibility of closure, industry associations and law experts said. The gaming companies have now pinned their hopes on the review of the levy six months after its implementation.
The increased tax burden on the online gaming companies will still be about 400-500%, as the GST being levied is much higher than the actual revenue earned by these companies for providing services to the users on their platforms.
Simply put, if a gamer deposits Rs 1,000 from his or her bank account to the gaming wallet account, then that money will be taxed at 28%. However, when the person enters the contest and wins, suppose Rs 300, then there will be no tax on the Rs 300. This means every time new amount being put from the bank account to the gaming wallet, will attract taxation.
“We believe the decision by the GST Council of valuation on deposits will severely impact the online gaming sector and result in a situation where a majority of players, including the MSMEs will no longer be able to survive in the face of the increased tax liability of 400-500%,” said All India Gaming Federation (AIGF). The federation represents 120 online skill gaming companies across esports, fantasy gaming, casual gaming, card games, etc.
“Only established and well entrenched skill gaming companies may be able to scrape through this change by using their existing capital reserves to counter the effects of substantially increased tax liability. However, even their revenues and valuations will significantly fall,” the federation said, adding that it hopes that there will be a rethink after six months and a stable and progressive regime can be proposed.
E-Gaming Federation (EGF) and Federation of Indian Fantasy Sports (FIFS) in a joint statement said, “The new tax framework, while clarifying and resolving uncertainty, will lead to a very burdensome 350% increase in GST and set the Indian online gaming industry back several years”.
Lately, 30 domestic and foreign investors including Tiger Global, Kalaari Capital, Peak XV Partners, had also urged the government to consider GST only on the platform fee or gross gaming revenue and even batted for reducing it to 18%. The group of investors said the decision to increase the GST from 18% to 28% will adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years.
“Investors in this sector may continue to be concerned given the ‘blow hot, blow cold’ approach towards online gaming as a sector where on the one hand, the sector is lauded and encouraged through ‘light touch’ regulations by the MeitY and on the other hand punitive taxation is reaffirmed to be imposed under GST (despite several pleas from the sector),” said Sudipta Bhattacharjee, Partner at Khaitan & Co.
Saumya Singh Rathore, co-founder of WinZO said, “taxing GST on deposits rather than the technology platform commission charged by the companies will make the unit economics unviable, wiping out 80% of the industry, with fatality concentrated in MSMEs and startups that house new age business models. This increase of 400% will solely encourage the rise of monopolistic play”.
According to Rathore, “reasonable taxation can protect our over 500 million internet consumers from illegal offshore products”.
While the government has cleared its stance on tightening its noose on the offshore gaming platforms, the gaming firms still believe that it would be difficult to trace and block each and every website not complying with the law.
Ankur Gupta, Practice Leader – Indirect Tax at audit and advisory firm SW India, said, “By including virtual digital assets, the government has plucked the overseas gaming platforms who have no base in India and operate only on cryptos or alike if they have Indian customer base”.
“It will be interesting to see how the government will keep a track of compliance by overseas players and how much effective blocking work as operating through changed IP address is a common phenomenon in the industry,” he said.
Shivani Jha, a tech policy lawyer said, “the heavy tax burden will be detrimental for gaming companies and gamers. Trickling to the livelihoods of game developers, who make the game. The blanket provision on skill and chance games further muddles due process. Additionally, this may move users to illegal offshore betting platforms”.