Don’t have the Blood of the Gaming Sector on your Hands, Madam Finance Minister!

TK Arun

The issue is not the rate of tax; it’s the taxing of turnover, and not the gaming company’s revenue

As the GST Council meets again on August 2, it should reconsider its decision to levy GST on the turnover of the online gaming industry rather than on the fees it receives for organising games. Here is why, quite apart from the tens of thousands of jobs at stake, $2 billion of venture capital would go down the drain if the tax stays.

At the outset, let it be clear that the issue is not the rate of tax, that the rate has been raised from 18% to 28%. The problem is that the tax is being levied on the turnover, and not on the revenue that accrues to the gaming companies, and the rationale used to justify it.

There is a rift in the governmental system over gaming, between the Ministry of Electronics and Information Technology (MeitY) and the Ministry of Finance (MoF) at one level, and between the Central government and the state governments, at another.

MeitY wants to promote the online gaming industry as a potential big business, which could generate hundreds of thousands of high-value jobs, spur innovation and give India a decent slice of both the fast-growing business of entertainment across the globe and a specific segment of it, gaming, already a $200 billion market and growing. MoF, on the other hand, sees multiple golden eggs in the belly of this goose, and is reaching for the knife.

Gaming superpower

The Prime Minister has made public statements about making India a gaming superpower. But he is the head of only the Central government. The states are not all on board with this vision, especially as some of them conflate online games with gambling, and gambling is a state subject in the constitutional scheme of things.  

The Prime Minister has made no effort to create a cohesive view on gaming within the federal polity, either on an ad-hoc basis through a consultation, or through an institutional mechanism such as the Interstate Council.

Schizophrenia within the government system could prove injurious to the economy it governs.

Contempt of court

Another concern is that the GST Council wallows in contempt of court, when it glibly declares there is no distinction between games of chance and games of skill. In multiple judgments, one of them dating back to the 1960s, the Supreme Court has drawn a clear distinction between games of chance and games of skill, and specifically ruled rummy a game of skill.

In May, the Karnataka High Court delivered a lucid verdict that invalidated a tax claim on a gaming company raised within a framework now sanctified by the GST Council, of taxing the turnover rather than the service fee collected by the gaming company. In that dispute, the government had put forward the very same arguments deployed by the GST Council to tax the gaming company’s turnover, rather than its revenue from organising the game, which is the platform fee it charges the players. The Karnataka High Court did not summarily give its opinion; rather, it delivered a reasoned judgment, disproving, one by one, the individual elements of the tax authorities’ contention, and elucidating the rationale for its order.

For the GST Council to behave as if that judgment did not exist or does not matter is to challenge a basic premise of Indian democracy: laws must be reasonable, fit in with the rights guaranteed by the Constitution, and the courts have the authority to decide reasonableness and compatibility of any piece of policy or legislation with the basic framework of the Constitution.

Integrity of tax system

A third concern is the integrity of the Indian tax system. GST is a value added tax levied on supplies, whether of goods or services. What does the gaming company supply? It is the opportunity to play a game online, bringing in other players and the technology that allows the game to proceed as per the game’s rules. What is the price of the supply? It is the platform fee, or the gross gaming revenue, not the entire amount a player deposits at the commencement of play.

That deposit has two components, one, the platform fee that accrues to the gaming company, typically 10% of the contest entry amount deposited, and, two, the stake. The stake is held in an escrow account, and goes, once the game is over, to the winner of the game. Not a rupee of it goes to the gaming company. To levy GST on the stake is in stark violation of the basic principle of GST.

Does violation of principle matter? After all, collection of tax is an exercise of state power. Why shouldn’t the state collect whatever tax it deems fit? India is now part of the globalised world, and is actively engaged in harmonising its taxes with the practice of other countries, so as to get its legitimate due from giant global companies that spend small fortunes on tax planning, to take big fortunes outside national tax nets. In this context, having a tax system that is non-arbitrary and justified by its own stated premises matters. International arbitration of tax disputes between India and multinational companies would be influenced by the integrity and logical coherence of the taxes India levies.

Flawed argument

This is where the GST Council’s cleverness kicks in. It defined the gaming company’s turnover as an actionable claim, like a lottery ticket or the bet placed on the outcome of a race at the course. The GST law has a provision that enables an actionable claim to be taxed at its face value. 

Logically speaking, this is flawed, and conceptually alien to the GST framework. But, so goes the justification, the taxed entity is gambling and deserves to be burdened with discouraging taxes, in any case. The breezy dismissal of any distinction between a game of pure chance, which is what gambling is all about, and a game of skill, is designed to justify treating a gaming company’s turnover as actionable claims.

This is where MeitY feels particularly miffed. Just three months ago, it came out with rules for gaming, complete with provisions to eliminate gambling, addiction, harmful content, under-age participants and the like, and to set up one or more self-regulating organisations. The games that continue in India would be in compliance with these rules and would be free of any taint of gambling. The GST Council treated MeitY’s efforts to nurture a growing, global business within safe parameters with the same contempt that it showed judicial pronouncements.

Suppose the real money games that are at stake offered a game like roulette, in which players play the House, meaning the company, the GST Council would be right to call it gambling. But the games at stake are ones in which players take on their peers, and win, based on how skilfully they play — they do not play against the company at all.

What if some of the so-called peers are stand-ins for the company and the game algorithm is skewed to make these impostors win more often than regular players? The gaming companies’ algorithms are certified by global certifiers and are open to inspection any time. Global venture capital invests in Indian online gaming to make legal profits, not to lose its money in illegal gambits that require just one exposure for the investee company to fold up.

What of complaints of youngsters spending their money and time on gaming, and falling prey to loan sharks to feed their habit? This is not a trivial matter. Every player has to comply with Know-Your-Customer norms before he can start playing. That is how the gaming company deducts income tax at the highest rate on their players’ winnings. Gaming companies can be required to set limits on how much an individual can spend on games each month, depending on credit scores, spending limits on cards, etc.

Address the issue

Addictive behaviour involves a pathology that requires to be treated on its own terms. Not every person who drinks becomes a drunkard. Not every person who watches anime, streams shows or plays games on his handset becomes what the Japanese call an otaku, people whose obsession with things that entail staring at a screen makes them social outcasts. The solution is not to ban alcohol or manga, Netflix or games, but to nudge the patient to social engagement and moderation.

If the best laid plans of mice and MeitY go awry, why should the rest of us worry? The world economy is evolving to increase the weight of entertainment among economic activities. And gaming is a bigger segment of entertainment than movies – globally, four times as big. Irrational taxation would have the effect of killing much of the industry.

Already, the winning in an online game played at an Indian gaming site is taxed at 30%. Now, if the stake is shrunk beforehand by a tax of 28%, many players would decide it’s better to play on non-Indian sites that proliferate online and pay no tax in India whatsoever. The result would be to kill off most of the 400 odd Indian gaming companies that operate today. 

A handful of the very biggest might survive till the GST Council decides to change its mind, exclude the stake from GST and restore the incidence of GST to the gaming company revenue, as it had been when the handful gaming companies that existed before the introduction of GST in 2017 paid service tax. But the younger and smaller companies would perish, destroying the jobs and aspirations of their workforce and chilling investor enthusiasm to keep investing in Indian startups. 

Already, these gaming companies face resignations from top tech talent and find it difficult to recruit fresh talent. Does the GST Council want only the big to survive, and ready to wield state power to kill the competition?

Real money games are but a start. India’s varied cultural inheritance of epics, folktales and myths offers up characters and storylines that can dazzle the world, once embedded in assorted games. Artificial intelligence will help Indian game producers vault over language barriers. Superfast broadband will make access universal.

Unniyaarcha, the beauty of Kerala’s Northern Ballads, who could fight off, thanks to her kalaripayattu skills, a horde of would-be sexual predators, Kabandha, a disgustingly loathsome villain from the Ramayana, who has his decapitated head attached to the middle of his torso, Vikramaditya’s Vetal — such characters are legion in Indian lore, who can sustain entire franchises on the power of the imagination underpinning their creation and detailing — if only they are not killed off by arbitrary taxation, right as they germinate as games, in the dreams and ambitions of India’s talented young entrepreneurs.

The article was published in The Federal as Finance ministers, do you want blood of gaming industry on your hands?

Read more about the author: Manipur’s tragedy beyond distortion