Level up or log out: the Indian gaming industry is at a crossroads

Taxation of online gaming has become an issue in India, which is the world’s largest mobile gaming market and has huge employment potential.

India has a strategic advantage due to low data prices, robust public infrastructure for digital payments and lower barriers to entry for mobile gaming, as there are few hardware and software restrictions, unlike PC (personal computer) and console gaming. That is why a good solution to the problem is important.

The story so far

Recently, the Supreme Court said that all pending cases related to online gambling in courts would be heard centrally by the apex court. This is a welcome step and gives hope for a pragmatic solution and improved tax certainty.

Recognizing that the AVGC (animation, visual effects, gaming and comics) industry has enormous potential to enhance domestic capabilities and increase employment opportunities for youth, the Government of India has established an AVGC Task Force under the Ministry of Information and Broadcasting to recommend relevant initiatives. .

In December 2022, the task force submitted its report based on three elements: creating world-class products in India, upskilling and empowering the youth, and promoting the segment by providing technology and other incentives.

However, regarding the Real Money Gaming (RMG) segment of gaming – through new tax rules in July 2023 – the Center announced that it would impose 28 per cent GST on the total game value for online gaming, casinos and horse racing. In other words, under the new tax regime, skill-based online games were placed on a par with online gambling.

Considering that there are over 400 RMG startups and their revenues constitute a whopping 82.8 percent of the online gaming segment, the revised GST rates will have a major impact on these revenues, which are expected to decline to 75.4 percent by FY28 .

Additionally, while winnings below ₹10,000 are not subject to TDS (tax deducted at source), this is now applicable on all net winnings. Therefore, OGIs (online gaming intermediaries) have been directed to deduct TDS at the rate of 30 percent from the net profits of user accounts either at the end of the financial year or during this year in case of withdrawal. As a result of the revised income tax rules, income from prize money or winnings is not outside the scope of income tax. The new rules have thus increased the tax burden on users and compliance with OGIs.

The untapped potential

Despite the rapid rise of the online gaming industry post-pandemic, the domestic online gaming market represents barely 1.1 percent of global online gaming revenue.

Nevertheless, given its enormous growth potential – due to its largely untapped market – online gaming has attracted great interest from investors. Since FY20, the segment has seen investments worth ₹22,931 crore from both domestic and international investors. However, in addition to uncertainties in the tax and regulatory regime, the macroeconomic headwinds of the past year have led to a relative dip in investments.

In FY23, the gaming industry employed approximately 1,00,000 people – directly and indirectly – in various roles, including core and support functions. Earlier, this number was expected to reach 2,50,000 employment opportunities by 2025, but higher tax levies are expected to cause a lower increase in job openings.

When the 28 percent VAT came into effect from October 1, 2023, the impact was felt almost immediately. Some companies announced layoffs to cut costs, with one company even announcing it would shut down its operations in India, and smaller entities ceased operations. More companies could soon leave the Indian market as the higher tax burden starts to weigh on them.

Apart from the above, the tax hike would also lead to many users switching to offshore betting and gaming platforms, which are not registered under the GST regime. Since these are offshore platforms, there would be virtually no protection for vulnerable Indian users.

Taxing times

The growth of online gaming is currently under threat due to the country’s complex and ever-evolving tax landscape. Previously, a clear distinction was always made between ‘games of skill’ and ‘games of chance’.

The courts in India have interpreted the terms ‘betting and gambling’ to mean games of chance governed by the Public Gambling Act, 1867, or state laws on betting and gambling. Conversely, games of skill governed by the IT Act, 2000, and Intermediary Rules, 2021, have always been distinguished by the courts from gambling and betting and therefore exempt from the rules of the Public Gambling Act.

Nevertheless, the revised tax rates go against India’s historical position on indirect taxes and international best practices, which limit these rates to 15 to 20 percent. Accordingly, equating games of skill with betting, gambling or lotteries under tax rules will lead to a classification error.

Furthermore, this will cause major disruption to the sector and its supply, impacting growth prospects in both the short and long term.

(The author is founder of Rastogi Chambers)