Decoding the impact of the 28% tax on online gaming firms
The Group of Ministers (GoM) submitted its second report to address the taxation issues related to online gaming during the 50th GST Council meeting. Reviewing the report, GST Council has made the decision that online gaming, horse racing, and casinos will be subject to a tax rate of 28%.
- Online gaming and horse racing will be incorporated into Schedule III of the law as taxable actionable claims, subject to taxation.
- Casinos, horse racing, and online gaming will be subjected to a consistent tax rate of 28%, ensuring equal treatment across the board.
- Tax will be imposed on casino chips’ face value, horse racing bets’ full value with bookmakers or totalisator, and online gaming bets’ full value.
The 50th GST Council meeting in India has brought significant developments in the taxation of various sectors. One of the key decisions made by the Council is the imposition of a 28% tax rate on online gaming, horse racing, and casinos. The move aims to ensure uniformity and equal treatment across these industries.
GST Council reviews taxation for online gaming and casinos
In order to address the taxation issues related to casinos, horse racing, and online gaming, a Group of Ministers (GoM) was established. The GoM submitted its initial report in June 2022, which was subsequently presented during the 47th GST Council meeting. However, during the meeting, it was determined that the GoM should revisit the issues and provide further recommendations. As a result, the GoM prepared a second report, which was presented during the 50th GST Council meeting. The GoM highlighted the lack of consensus on whether the activities of online gaming, horse racing, and casinos should be taxed at 28% based on the full-face value of bets placed or on the Gross Gaming Revenue (GGR).
After reviewing the 2nd report of GoM, the GST Council came up with the decision to that online gaming, horse racing, and casinos will be subject to a tax rate of 28%.
The taxation will be based on specific elements in each respective sector. For casinos, the tax will be applied to the face value of the chips purchased. In the case of horse racing, the tax will be imposed on the full value of the bets placed with bookmakers or through the totalisator. For online gaming, the tax will be applicable to the full value of the bets placed. This approach ensures that the tax is levied on the relevant components within each sector.
Is there a connection between this taxation and IT rules?
In April this year, the IT Ministry notified rules for online gaming intermediaries, allowing for the creation of self-regulatory bodies that will regulate permissible online games.
The decision of the GST Council aims to address the taxation aspect of online gaming and align it with the IT regulations set by the Ministry of Electronics and Information Technology (MeitY). Under the amendment, online gaming companies will be subject to taxation without distinction based on whether the games require skill or are based on chance. Additionally, there will be a modification in the definition of actionable claims in the GST law to accommodate these changes.
Union Finance Minister, Ms Nirmala Sitharaman, explained that the amendment is purely based on taxation. She added, “We will still align with what MeitY wants to bring in as their regulation…there will be an amendment to Schedule III of the GST Act and we will be bringing in online gaming into the actionable claim list where item number 6 clearly says betting, gambling and lottery are already in it. We will be including online gaming and horse racing also into it…therefore they will be taxable on full face value at 28 per cent.”
What does the gaming industry say?
Malay Kumar Shukla, Secretary of the E-Gaming Federation called the move “an extremely unfortunate decision as charging a 28% tax on full face value will lead to a nearly 1000% increase in taxation and prove catastrophic for the industry.”
While the government maintains that the decision is not aimed at terminating any specific industry, the industry’s opinion tells a different story.
As per the gaming industry players, when taxes exceed the revenues generated, it creates a significant burden that poses a threat to the viability of the online gaming industry. This imbalance in taxation not only favours illicit operators in the black market but also undermines the legitimacy of tax-compliant players. This situation will not only damage the reputation of the industry but also weaken its ability to survive in the long run.
The gaming industry urges the government to consider alternative taxation models that take into account the unique dynamics and challenges of the online gaming sector. A collaborative approach between the government and industry stakeholders could lead to a more favourable tax regime that supports growth, innovation, and responsible gaming practices.
On the other hand, it is found that many state finance ministers raised concerns over the growing addiction to online gaming, especially among children, in the Council meeting. The decision to impose a uniform 28 per cent was then taken with the consensus of all states.
The decision by the GST Council to impose a 28% tax rate on online gaming, horse racing, and casinos has sparked significant concerns and debate within the gaming industry. Critics argue that such a high tax rate, based on the full face value of bets placed, will lead to a drastic increase in taxation and could prove catastrophic for the industry.
Certainly, it is essential to acknowledge the concerns of the industry and take steps to ensure its long-term viability and competitiveness. However, the recent decision has been implemented without differentiation, encompassing both gaming and gambling platforms. This approach disregards the efforts made by certain companies to establish a clear distinction between games of skill and games of chance, and which have engaged in extensive lobbying endeavours to position themselves apart from gambling platforms.