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Online gaming industry in India seeks clarity on taxation

The online gaming industry is expected to grow at a compound annual growth rate (CAGR) of 22% to $2 billion by 2023, up from $906 million in 2019, according to a report by All India Gaming Federation (AIGF) and EY India. (Photo: Getty Images)Premium
The online gaming industry is expected to grow at a compound annual growth rate (CAGR) of 22% to $2 billion by 2023, up from $906 million in 2019, according to a report by All India Gaming Federation (AIGF) and EY India. (Photo: Getty Images)

  • GST implications and impediments may impact the business operations for the game industry, according to a report by All India Gaming Federation (AIGF) and EY India

NEW DELHI: The online gaming industry is expected to grow at a compound annual growth rate (CAGR) of 22% to $2 billion by 2023, up from $906 million in 2019, according to a report by All India Gaming Federation (AIGF) and EY India. Largely driven by young and tech-savvy population, broad internet coverage, affordable smartphones with better performance, India is now the fifth largest online gaming market globally which is further expected to grow after covid-19 induced digitization.

Online gaming is also the fourth largest sub-sector in media and entertainment sector. The report stated that online gamers are estimated to grow from 360 million in 2020 to 510 million in 2022. While online real money game players are expected to grow from 80 million in 2020 to 150 million by 2023.

The findings revealed that by creating over 11,000 jobs, the e-sports segment is estimated to generate around 100 billion of economic value for India between 2021 and 2025, comprising investments, in-app purchases and winnings.

Considering the growth prospects of the industry, the report also analyses the GST implications and impediments therein that may impact the business operations for the industry. It said that the tax rate should not exceed 20%, as this can result in the gaming operators as well as consumers to not join the licensing system of the government and entering the grey market.

Online games operate either on the ‘rake fee’ model wherein the gaming platform charges a rake fee for facilitating the play of games or ‘freemium’ models wherein the gameplay is free but additional features may require the user to purchase certain items for a monetary price. A rational imposition of Goods and Services Tax (‘GST’) is important for sustaining this industry, the report said.

A vast majority of countries tax the online gaming industry at or below standard GST/VAT rates. The most common mode of taxing is based on the rake fee (platform fee) earned by the industry players in markets such as US, UK and EU countries (except France). In some countries (such as South Africa, Singapore and Australia), deemed credit model is followed where tax is charged on entire stake value (wagers) while allowing deemed deduction on pay out (winnings) made to players.

“The valuation disputes under GST law have been a dampener to the industry. It is important to highlight that regressive taxation of these emerging sectors may only make the business unsustainable in India. Our recommendation is that the tax authorities should align their policies with internationally accepted principles of taxing the online gaming sector and provide certainty to the industry," said Roland Landers, chief executive, All India Gaming Federation.

Highlighting the much debated topic of legality of online gaming in India, the report stated that various high courts across the country have held that Rummy, Poker, and Fantasy Sports games are games of skill and do not amount to betting or gambling. E-sports shall also qualify as a game of skill by applying the principles laid down by the courts.

Bipin Sapra, partner, EY said, “The government needs to unambiguously state and clarify that games of skills such as rummy, fantasy sports, poker, etc., which are different from games of chance such as lottery, betting and gambling, will be taxed at the normal GST rate of 18% and the taxable value will be the platform fee or rake fee. A clarification to this effect will give certainty to this Industry and foster more investment in this sector."

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