Home / Opinion / Views /  Let’s not tax online gaming industry out of business

India dreams of a $1 trillion digital economy by 2025. Even with bearish macroeconomic factors across the globe, experts believe that India might still be able to achieve this dream, albeit with some delay. As in the past, the contributors to India’s digital economy will not be limited to a handful of business-to-business (B2B) service-centric information technology companies. We are seeing multiple sunrise sectors in the digital space raring to go full-steam ahead. From artificial intelligence (AI) based services to neo-banking, from health-tech products to online gaming, there is no dearth of innovative sectors that show huge economic potential. Consider online gaming.

This industry is valued at about $2 billion currently and is expected to reach $5 billion by 2025. Foreign investors were so bullish on it that they invested more than $1.6 billion in just the last 18 months. Industry estimates suggest that the industry provides 50,000 jobs directly and many more jobs indirectly. Even Prime Minister Narendra Modi had said that if our children were going to play video games, why couldn’t these be Indian-made games. ‘Create in India’ and ‘Brand India’ were the clarion calls he used to motivate the online gaming sector.

However, for any new and innovative industry to succeed, a core condition must be met: that there must be a convergence of government policies across domains to support and incubate the industry. These domains usually include sectoral regulations, the taxation regime, credit support, specialized infrastructure, economic incentives and the ease of doing business. But there are times when government policies for a sunrise industry may not align as needed to create a nurturing environment.

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Indian online gaming firms are facing a similar conundrum. On one hand, the Union ministry of electronics and information technology has been holding consultations to bring in positive and comprehensive regulations for online gaming. On the other hand, the group of ministers (GoM) on casinos, horse racing and online gaming suggested a crippling goods and services (GST) regime for the same online gaming industry. Though the GoM is reconsidering its recommendation, those dark clouds are yet to pass. Such an uncertain situation has blown hot and cold on the upward trajectory of online gaming companies.

Before jumping into an analysis of these divergent policy stances, we need to understand how online gaming and pay-to-play games are different from gambling. India’s Supreme Court and various high courts have held that games that have a predominance of skill involved in their outcomes are classified as games of skill, while games based on the predominance of chance are gambling. Online games of skill are protected under the Constitution, while gambling is outlawed in most states. However, many states confused games of skill with gambling and tried to ban them. Some of the high courts of these states came to the rescue of these skill games and declared such bans unconstitutional. To avoid such confusion, the central government has contemplated uniform regulations for online gaming.

On 7 June 2022, Rajeev Chandrasekhar, minister of state for electronics and information technology, held consultations with stakeholders for online gaming. It was a treat to watch a technocrat dissecting the issue better than the experts present in the room. He understood the debate between games of skill versus games of chance and asked tough questions where needed. The outcome was a positive impetus towards formulating a robust regulatory regime which supports innovation while holding the industry to fair standards. This process is underway and the industry is optimistic.

Reports suggest that the GoM recommended GST to be levied on the entire contest-entry amounts for online games. This would increase GST by 1,100% and make these games cost their players three times more. This is unheard of in any industry and is most likely to cause irreparable damage. For now, online gaming platforms are paying 18% GST on the service fee they charge for providing games, like any other online service. But now the GoM may recommend that they pay 28% on the whole entry amount, which even includes the prize pool for the winning player. This means players will pay GST not only for the service provided to them but also for their own money that goes into creating prize pools. It is like paying GST for money kept in an escrow account or taxing an unsecured debt. Reports suggest that this situation has arisen as the GoM may have equated games of skill with gambling for taxation purposes. Taxing a constitutionally protected legitimate business activity the same way as gambling is surprising; it may be even unconstitutional. Incidentally, the GoM has deferred its recommendation for a few weeks to reconsider its stance. This has given some respite to the online gaming industry.

India has time and again faced a situation where it missed the bus for recognizing the economic potential of new technologies. Be it the social media boom or semiconductor development, we have always been left to catch up. Due to India’s deep mobile internet penetration and financial inclusion programmes, online gaming (especially mobile) is an industry where we may still be able to compete globally. All that this industry needs is a rational and synchronized framework under which our tax policy is consistent with a positive vision for online gaming.

Dhruv Garg is a Delhi-based lawyer with a practice in technology law and policy.

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