By T.R. Venkateswaran
In the dynamic landscape of the Indian economy, the online gaming sector has emerged as one of the key catalysts for innovation and economic growth. This sector draws substantial investments from both emerging and established venture capitalists and this industry has also played a pivotal role in shaping India’s digital growth in recent times. The gaming sector also boasts of very high user interactions daily and this also encourages allied sectors such as digital marketing and advertisement. Predictions have pegged the sector to reach a remarkable size of $20 billion by 2030, prompting governmental attention towards its regulation. While regulation of the sector is a desirable outcome and can also result in more standardisation of the rules and procedures, recent decisions made by the GST Council and the GST department have cast a shadow of uncertainty over the sector’s future.
The industry faced a double blow, with the GST Council’s decision to impose a tax on gross deposits and subsequent legal actions adding to its woes. The imposition of the tax on gross deposits has already led to layoffs and closure of some of the players. This legal limbo, compounded by ongoing investigations by tax authorities, threatens to destabilise the sector, potentially leading to its demise.
Taxation has historically been a contentious issue and it would be prudent for any government to tax any sector in such a way that while it augments revenue for the government, should not result in excessive burden for the relevant sector. In the last few years, there have been several reforms in taxation precisely to strike such a balance. However, the gaming sector has been subject to excessive taxation of late. To make matters worse, retrospective taxation has sparked heated debates, as it challenges the essence of fairness and legality. The current interpretation of the tax department to treat the new amendments as applying retrospectively to the online gaming industry raises significant legal concerns, likely to be tested in the judiciary.
The application of these amendments disregards established legal principles, treating all online gaming platforms uniformly without distinguishing between ‘games of skill’ and ‘games of chance.’ Such a blanket approach contradicts decades of legal precedent and invites scepticism regarding the legitimacy of these changes.
Since introducing the Goods and Services Tax (GST) in 2017, businesses have invested heavily in compliance measures to adhere to taxation regulations. However, the sudden demand for a staggering Rs 150,000 crore in taxes from the online gaming industry has caught many operators off guard, threatening their financial viability. Moreover, the retrospective nature of these demands, coupled with already disbursed prize winnings, leaves operators in an untenable position, potentially paving the way for bankruptcy.
This taxation turmoil not only burdens online gaming operators but also sets a worrying precedent for other sectors. The lack of clarity and sudden tax demands undermine business confidence and hinder entrepreneurial endeavours. Furthermore, from an economic standpoint, retrospective taxation risks deterring future investments and tarnishing India’s image as an investment destination.
The recent decisions by the GST Council and taxation authorities to impose taxes on online gaming deposits underscore the need for policymakers to tread carefully. Balancing the interests of stakeholders while upholding legal principles is imperative to ensure the continued growth and success of the online gaming industry in India.
The author is a chartered accountant and a partner in a Big Four consulting firm