06.06.2023: The GST Council and Meity must provide clarity on legal status of online gaming industry

As India moves to embrace the new economy, it is looking at several sunrise sectors that offer immense potential for growth. For decades, India has been seen as a consumer of the internet, and not as a producer. This led to a situation where traditional big technology companies have dominated the Indian market, while Indian start-ups have struggled to establish themselves in India and abroad.

But a slew of new companies is beginning to change that. Online gaming is clearly one such area that not only offers immense growth potential, but also offers India to corner the global market as well. Besides enhancing India’s global clout, it can also establish her reputation as a country open to innovation and ease of business.

A key issue that continues to hamper the real growth potential of online gaming is the current Goods and Services Tax (GST) regime. GST on online gaming has been a matter of contention for quite some time. A significant challenge has been the perception that gaming is akin toOnline gaming is clearly one such area that not only offers immense growth potential, but also offers India to corner the global market as well. betting and gambling, and should, therefore, be taxed similarly. However, not only has the Supreme Court of India clarified the distinction, the latest rules issued under the Information Technology Act by the Government of India makes it clear that online games and fantasy sports are the new engines of growth for the Indian economy.

Historically, online gaming platforms are taxed on their platform fee – that is the amount remaining after the prize winnings are distributed to winners. This is known as taxing Gross Gaming Revenue (GGR) – the total prize pool minus the distributed winnings.

The online gaming industry has consistently argued that it is distinct from betting and gambling. They assert that their prize pool is distributed completely to users and not part of their revenue. While the GST council and the Group of Ministers (GoM) committee are deliberating on the matter, it is crucial to examine the recent changes that impact the industry’s legal position that impact the decision.

The appointment of the Ministry of Electronics and Information Technology (MeitY) as the central nodal agency to regulate online gaming and the subsequent rules notified by them reinforce online gaming as a legitimate business activity, effectively differentiating it from betting and gambling. Any game that is certified by the Self-Regulatory Body (SRB) to be recognised by the Government of India will enjoy a clear & distinct legal status from gambling, betting, and lottery. With this, the concerns of online gaming being akin to betting and gambling are dissolved.

States differentiating between gaming and gambling

The Chhattisgarh Gambling Prohibition Act, 2022 was notified in March this year, primarily to prohibit online gambling and betting. It outlaws online gambling entirely but excludes “games of skill”. This should serve as a precedent for other states that might be considering legislation against online gambling & betting, while remaining cognizant of a legitimate and growing industry sector. This is also a reflection of the cognizance and increasing understanding of governments of how online gaming is not synonymous with gambling and betting.

Considering these recent developments, the GST council needs to consider the following points as it deliberates on a tax framework for the online gaming industry:

  • Recognise the Distinction: The council should acknowledge the differences between online gaming, betting, and gambling, and avoid treating all businesses in a similar manner which is not inline with the GST Laws.
  • Fair Taxation: The council must propose a tax framework considering that the prize pool is an actionable claim and not part of their revenue. Additionally, with TDS being applicable on the prize pool at the highest rate of 30%, any additional tax burden will make this industry and business model unviable.
  • Consistency with the Service Tax Regime: It would be appropriate for the council to maintain consistency with the service tax regime and continue to tax online gaming as an OIDAR service, rather than as ‘goods.'
  • International Best Practices: In developing the tax framework for online gaming, the council should strive to align with international best practices to promote a healthy and competitive industry in India.

As the online gaming industry continues to evolve, it is vital for the GST Council to develop a tax framework that acknowledges its unique nature and supports its growth. By considering the recent developments in regulations and laws, the council can establish a fair and just taxation system that encourages the industry to thrive while ensuring that tax revenue is appropriately collected.

Source: The Economic Times 

Register Today