Top investors ask PM Modi to review online gaming tax

A group of 30 Indian and foreign investors, including marquee names such as Indian venture capital firms Kalaari Capital, Peak XV Partners (formerly Sequoia India and South-East Asia) and Lumikai, and US firms Tiger Global Management and Tribe Capital, on Friday wrote to Prime Minister Narendra Modi, seeking a meeting to elucidate the impact of the Goods and Services Tax (GST) Council’s recommendation to tax the online gaming sector at 28% of the gross revenue earned by companies in this sector.

The letter claimed that the new recommended tax for the sector could lead to an increase of up to 1,100%, based on the present interpretation of the GST Council’s recommendation to tax real-money online gaming companies at 28% of the “full face value” of their earnings.

“Skill-based real-money gaming is India’s largest gaming sub-sector, contributing to a majority of the $2.9 billion online gaming industry by revenue in 2022. As a result, it has attracted $2.5 billion in global funding across approximately 400 RMG startups. Some of these startups are unicorns…and have received significant capital from global marquee investors. The current GST proposal will set up the most onerous tax regime for the gaming sector globally, which will lead to a potential write-off of the $2.5 billion capital invested in this sector,” the letter said.

It added that enforcing the presently recommended tax rate may “adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years…and substantially and meaningfully erode investor confidence.”

Projections offered by the letter claimed that real-money online gaming startups, where users pay to participate in titles such as rummy, are estimated to contribute ₹4,500 crore in GST, based on presently levied rate of 18% tax on the net income of companies.

“This deleterious impact on the industry is expected to result in loss of over 50,000 high skilled jobs and a further loss of livelihood opportunity for over one million Indian citizens who are indirectly associated with this industry. The industry also spends roughly $1 billion in advertisements, which would be completely wiped off,” the letter addressed to the Prime Minister read.

The letter comes after Union minister of state for electronics and technology, Rajeev Chandrasekhar, tweeted on Tuesday, stating, “After the nascent (and) evolving regulatory framework around the online gaming rules that define permissible online games develops, then we will communicate new framework to GST council (and request) them to consider this new framework.”

On 11 July, the GST Council in its 50th meeting recommended the new tax regime proposing a 28% tax on the gross gaming value (GGV) or total revenue earned by online gaming companies—instead of on gross gaming revenue (GGR) or net earnings that industry operators had been pushing for.

Industry experts said the taxation recommendation failed to acknowledge discussions on the difference between games of chance and skill.

Akash Karmakar, partner at law firm Panag & Babu, said, “While it would be fair to treat all games of chance as gambling or betting, clubbing all online games with games of chance, an entirely different species, points to the GST Council’s intent to disregard distinctions in tax treatment for revenue arising from skill based and chance. This unwillingness to appreciate the distinction between games of skill such as poker and rummy and games of pure chance are in stark contrast to the patience that courts have demonstrated in drawing bright lined distinctions to guide legislation.”

However, others said expecting a revision to the council’s recommendations may not be entirely straightforward.

“It would be quite unprecedented for the GST Council to relook at one of its recommendations so soon after taking a considered decision. MeitY (ministry of electronics and information technology) may approach the GST Council secretariat and the finance ministry to request the matter to be taken up at the next GST Council meeting, but whether it does get taken up for revision would depend on the consensus of the GST Council’s members. A change in the GST Council’s decision cannot take place at the behest of any individual member without consensus or majority agreeing to it, and although the council revising recommendation is not unprecedented, it is normally not done in a short time span after originally deciding something,” said Jay Sayta, a technology and gaming lawyer.

A senior industry official with a prominent online gaming platform said real-money online gaming contributes to “nearly all” of the revenue earned by companies from their India operations.

“If you look at casual games and esports, revenue through in-game items and advertisements is a model that has worked in mature economies and global markets—this does not hold true for us in India. This leaves us with limited avenues to expand our margins by focusing on other avenues away from real-money titles that qualify as skill games,” the official said.

The letter to the PM by investors detailed multiple taxation scenarios, stating that the full face-value taxation model could lead to an increase of 1100% in tax burden for online gaming companies.

“If ‘full value of bets’ ... is the full deposit value, i.e. deposits made by users and not taxed again if the winnings are redeployed to play a game (at par with casinos), there will be a 350% increase in GST burden,” the letter added. Imposing 28% tax on net earnings, meanwhile, would increase tax burden by 55%, the letter claimed.

Industry experts added that most global precedents in this regard point at the net earnings of online gaming firms being taken into account, instead of the gross revenue. These include markets such as the UK and state-wise legislation in the US—while the UK levies a 21% tax on the net earnings of online gaming firms, the state of Pennsylvania in the US taxes online gaming at 15%.

In the European Union, France and Germany are among developed economies that levy taxes at gross revenue for online gaming firms. A report by consultancy firm EY India from August 2021 said that France taxes online gaming operations at 1.8% of the “stake value” of wagers. Germany, meanwhile, is said to tax online gaming at 5.3% of the gross revenue. Acknowledging this global precedent, the letter to the PM by investors said France is presently working on a revision of the taxation model. Mint could not independently verify the authenticity of this claim.

However, the series of appeals made by the industry have claimed that the taxation rate is likely to be challenged. Sudipta Bhattacharjee, partner at law firm Khaitan & Co., said that the GST Council’s recommendations are non-binding in nature.

“The GST Council recommendations are not binding upon Parliament, or on state legislatures. This was clarified by the Supreme Court in its judgement on Mohit Minerals in 2022, which underlined the non-binding nature. This naturally offers room for the GST Council decision of 28% tax on the online gaming industry’s face value to be reconsidered. If there are compelling enough reasons, they can go back and relook at a recommendation passed,” Bhattacharjee said.

A senior consultant for the sector further added that most global precedents point at taxation on gross revenue for the sector to be a deterrent.

“Real-money gaming offers an automatic note of engagement among users, without needing companies to spend significantly and burn cash on user acquisition and engagement. This helps generate better revenue as well, something that casual games have not succeeded in doing so far. It is unlikely that this nature of users in India will change, which puts online gaming operators at risk,” the consultant said, requesting anonymity.