Why a high tax slab can be nothing more than a chord-cutting exercise for the online gaming industry

The online skill gaming industry continues to pay over Rs 2,200 crore per annum in GST

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Over the last decade, India has witnessed an unprecedented digital boom, including the  implementation of the Aadhaar ecosystem, UPI, as well as digital payments.

The pandemic witnessed the rise of the online gaming industry in India. Since then, the industry hasn’t looked back, despite people going to work and regulatory uncertainty. In fact, it is one of the fastest-growing industries. As per the latest FICCI EY report, the online gaming industry grew 28% in 2021 to reach the Rs 10,100 crore mark. The industry is further projected to grow to reach Rs 12,000 crore by the end of 2022. Meanwhile, online gamers grew by eight percent to 390 million in 2021.

However, the industry from time to time has come under the lens of various state governments to the extent of a few banning games. Recently, the online skill-based gaming industry has drawn the ire of various state governments that includes Tamil Nadu, Kerala, Karnataka and Telangana. And while these online gaming firms continue their battle at the state level, at the Center, the goods and services taxes (GST) seem to have created yet another whirlpool.

From what it is understood, the Group of Ministers (GoM), constituted by the Center to create a taxation model for the online gaming industry, has held several rounds of discussions to arrive at a GST bracket and valuation for the online gaming sector. And now, the Central Board of Direct Taxes (CBDT), which falls under the Department of Revenue under the Ministry of Finance, seems to be working on ways to amend the income tax laws.

The tax conundrum

The online gaming industry so far has paid 18% GST on the operator’s service fee called Gross Gaming Revenue (GGR). However, in the last few months, there have been discussions about whether the tax slab should increase to 28%. This means the slab will be equivalent to currently what is being paid in the case of the gambling and betting section of the online gaming industry. Interestingly, this will be implemented on the full amount including the prize pool. If the GST is hiked and calculated on the whole consideration, the operators would need to pay taxes greater than their revenue, which may render these nascent businesses unviable.

While the government is yet to formalise the slab, one cannot ignore the fact that the online skill gaming industry continues to pay over Rs 2,200 crore per annum in GST. This is projected to grow to Rs 7,000 crore over the next three years. But a high taxation slab could prove to be detrimental to its growth. What is to be noted is that every state gets a sizeable share, which thereby aids in an increase in revenue earned.

A calculative tour

When calculated, the statics reveal that if GST is levied at 28% on GGR, the GST collection will surge by 55%, but what this means is it will impact the profitability or let’s call it sustainability of gaming start-ups. To give a perspective, the tax levied will be on the revenue earned by operators, this means the GST collection will mop up to Rs 24,300 crore by FY25. Of this, states will receive around Rs 11,340 crore.

The online gaming sector is one of the sunrise industries – which has been built to meet the roadmap of Atmanirbhar Bharat. Currently, the industry employs over 50,000 people and according to a new report from staffing firm TeamLease Digital, it is expected to create one lakh new direct and indirect jobs by the end of FY23. However, all this could hit the wall due to steep taxation. One of the looming fear is that taxation could push consumers towards more lucrative options such as offshore betting and gambling websites. The government off-late too realised the deterrent caused by such offshore sites. As a result, no publishers are allowed to carry advertisements on these platforms. Not to mention, these offshore companies do not pay any tax. This is also a reason why the government needs to create a level playing field. High taxation would mean that operators would have to pay more taxes, which will be more than their revenue. This could mean that running these businesses will become unviable and perhaps will lead to the death of a few.

Also Read: Flipkart identifies tier-2 and tier-3 markets as key areas for growth; reduces shipment cost to drive high-profit margins 

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First published on: 07-12-2022 at 09:52 IST
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