The online gaming industry which is still reeling under the aftermath of the Goods and Services Tax’s (GST) Council’s decision to not only increase the taxes to 28% from 18% but also to make it applicable on the full value rather than gross gaming revenue (GGR), thereby decreasing prize pools significantly. “Earlier, the balance was completely available for distribution for prize pool post the platform fee deduction. However, the new rules suggest that the GST is deducted on the contest entry amount which would reduce the value significantly,” Prashanth Rao, leader- customer strategy and design, Deloitte South Asia.
Sample this: A Rs 100 participation fee earlier had 10% as a service charge amounting to Rs 10. Rs 1.8 was deducted as GST and the rest is the service fee for the platforms. The rest that is Rs 90 goes to the winner pool. However, post the decision, Rs 28 would be deducted upfront from the Rs 100 as GST, hence the entry fee would increase to Rs 128. The platform would also charge a service fee. Assuming it still charges the same amount as Rs. 10, the remaining amount that is Rs 62 would go into the prize pool.
The decision is based on the Group of Ministers’ (GoM) report who proposed the 28% GST on the total amount, including the platform fee. With the increase in GST, India’s gaming market has become one of the highest taxed markets globally. The increase in taxation would have a detrimental effect for the entire gaming industry. According to a report by Deloitte-FIFS, the gaming industry would lose its customer base with most of its gamers moving to offshore alternatives. “As a result of the decision, the users might start going to offshore platforms that are outside the jurisdiction of the Indian government which might be more harmful,” Shivani Jha, director, EPWA, said
Furthermore, the tax revenue collected has been projected to reduce with a decline in participation from users or in another theory it is believed that majority of gamers may favour offshore platforms. Not only that, the gaming industry will lose a major chunk of the foreign direct investments as a result of the high taxation rates. Loss of employment would become a real possibility as it may become difficult for many start-ups to remain viable. The report suggested that the industry would lose the potential to create approximately 20,000 jobs. More than 60,000 jobs would be at risk with the decision taken by the GST council. The industry may have to reduce costs with industry revenue predicted to shrink by around 33-43 times the current levels within the first five years. This is expected to result in lower investments in research and development, decreased innovation, and reduced spending on marketing and IT services. Ancillary industries associated with the gaming sector may also be adversely affected.
“The tax should correlate to the amount paid for the supply of service that is the inherent genesis of service tax. However, there is no supply in relation to the pooled amount towards winnings. There is no visible division between game of chance and game of skill as the government applies 28% GST on all gaming avenues,” Gowree Gokhale, partner, Nishith Desai Associates, said.
The implementation of the 28% GST would take approximately six to eight months according to industry experts. There would have to be changes in the CGST as well as SGST subjects which might take time.