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Is the 28 Percent GST a Fatal Blow to India's Online Gaming Sector?

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After the 50th GST Council stated its intention to apply a 28 percent GST on online gaming, along with horse racing and casinos, the gaming industry awoke on Dalal Street anticipating a rough day. As anticipated, shares of publicly traded companies such as Nazara Tech and Delta Corp have crashed greatly, with the latter plummeting 20 percent.

Over the last few years, India’s online gaming industry has witnessed massive growth, thanks to easy access to smartphones, as well as affordable mobile data. This led to the sector attracting foreign direct investment especially from the likes of Tiger Global. Valued at 135 billion Indian rupees last year, the sector is expected to gain a worth of over 231 billion Indian rupees by 2025, at an annual compound growth of around 19 percent, according to Statista.

According to research by the Federation of Indian Chambers of Commerce and Industry and EY (April 2023), online gaming companies made Rs 13,500 crore in 2022. In India, there were about 400 million internet gamers, with 90-100 million of them playing often. Real-money gambling accounted for 77 percent of segment revenue. According to the research, the online gaming business will generate a total revenue of Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, net of taxes.

The primary point of discussion has been how to classify online gaming as either a game of skill or a game of chance. The government is saying that if it is a game of chance, it will fall under the category of betting or gambling, and so will be subject to a 28 percent GST on the gross value. Gambling, which is considered a chance-based activity, is prohibited and frowned upon in many Indian states. However, most states have legalized skill-based internet gaming. The current step, the industry association predicts hundreds of thousands of employment losses in the online gambling business.

Current Scenario
Till date gaming startups have been paying a modest tax rate on the fee they charge for offering games. With the 28 percent GST will mean that the amount collected from gamers will come under the confines of taxation. No sooner the law comes into force, industry estimates that the total tax collection on gamer winnings will go beyond 50 percent, including GST, platform commissions and income taxes. Meaning, when each gamer spends around $ 100 an expected sunk or retrospective cost of $ 28 towards GST will follow together with $5-15 charged by the gaming platforms and 30 percent tax deducted at source (TDS) on any winnings drawn. Industry cautions that the result will leave gamers disincentive, aside from being inconsistent with global standards, with VAT or GST levied at a median rate.

More than 125 companies in India's emerging online gaming market warned the government that a decision by the Goods and Services Tax Council to drastically raise tax rates could result in a significant loss of investments and jobs for the industry.

Some are curious to watch how it will play out especially in the business impact for the online gaming sector, given that this area has been regarded to have substantial growth potential.

How does the 28 GST Work?
Except for the platform charge received by the online gaming operator, online gamers and poker players now have no influence of GST on the value of their bets or winnings. However, once the GST Council's decision is implemented, internet games and poker players will incur a direct hit of 28 percent on the face value of each bet placed.

This means that 28 percent GST will be imposed on a game's entire pool amount, 30 percent TDS on net earnings, and the site will charge its own participation fees.

Industry’s Reaction
Some say that given that the GST council's decision will have an impact on startups on multiple levels, including their user base, revenues, and investor sentiment, these growth rates may now be called into doubt.

Users would typically search for offshore or phony platforms that do not charge GST as a result of the tax requirement. This could prove detrimental and cost the industry a lot of money. Numerous negative effects, including a loss of revenue for the government, could result from this.

Levying a 28 percent tax rate on the gaming sector will be a major setback for Indian players because it ignores the long-standing desire of the gaming industry. With this latest round of lawsuits, some experts say that we might quickly observe notices being sent to gamers for discriminatory tax.

A few industry experts even compared the country’s sector to that of other country’s tax charges by saying that it is a disadvantage for Indian game companies if the taxability increases to 28 percent since the online gaming industry is generally taxed at a rate that is roughly equivalent to the present taxability of 18 percent.

Some are curious to watch how it will play out especially in the business impact for the online gaming sector, given that this area has been regarded to have substantial growth potential.

Impact on Gamers
While the new tax will be applied to the total amount of money placed by players, users will immediately see a drop in their prize money, which will disincentivize them from playing. As a result of the high tax rate, online gaming will become more expensive for users. This could lead to players looking out offshore or illicit platforms that do not charge GST or offer a lesser rate. This would be a significant loss for India's legitimate online gaming business, as it would give these offshore and illegitimate sites an unfair advantage. This might have a number of negative implications, including an increase in gambling addiction and a loss of government revenue.

Government is Positive about the Decision
The government is clear, however, that this is a device to discourage gaming, particularly among children, and therefore the levy.

The Finance Minister, Nirmala Sitharaman, after announcing the decision, said that the GST council, which consists of federal and state finance ministers, claimed that killing the industry is not its intention. She further went on to say, but they can't be encouraged to such an extent over essential goods and services.

Siddhartha Iyer, a Supreme Court lawyer, who is known to have been fighting to prohibit online gaming views the 28 percent tax as a step in the right direction. He believes that the government has taken the view that [these games] are gambling, and he believes that it is correct as gamers are betting on the performance of something over which they have no control. Similar to taxing alcohol and cigarettes to discourage people from doing these things, he views that it should be the same for online gaming as well.

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