The decision of the GST Council to levy a GST of 28 percent on the entire turnover of online gaming is plain wrong. It is bad in principle, against settled jurisprudence, harms a burgeoning industry with enormous potential for jobs and innovation, and, most perversely, carries an inbuilt algorithm to depress overall tax collections. It should not stand.
Middle-class India tends to view gaming with disdain: western contamination of chaste Indian culture in the eyes of some, sheer indulgence that wastes time and stunts young potential, for most. This attitude made sense in the stone age — perhaps.
Today, gaming is a $200 billion industry, nearly five times as large as the global market for movies. It is one of the largest creators of jobs, the terrain of startups and entrepreneurship. It is also one of the biggest drivers of innovation in the modern world.
The microchips that crunch massive amounts of data to generate artificial intelligence were first created to improve the quality of graphics in gaming. Vision Pro, the latest offering from Apple, the first company in the world to be valued at $3 trillion, offers mixed reality, the tech for which was derived from gaming, and the gadget itself will find its biggest use in gaming.
Industry Reacts to GST Council’s Decision
So, even if you don’t fully understand it, just accept that gaming is important, like differential calculus. And the GST Council has done a hatchet job on gaming.
True, online games of skill are only a subset of gaming. But once a segment gets taxed in a particular way, it tends to creep into the taxation of other segments as well. Getting it right is vital for this growing sector that already pays some Rs 2,200 crore of GST.
There is nothing wrong about taxing gaming. It should be taxed, and at the highest rate. The problem lies in conceptualizing the tax, on what the tax is levied and its implication for overall revenue collection.
The Impact of GST on the Indian Online Gaming Industry
The GST Council has decided that there is no distinction between a game of chance and a game of skill. Sorry, Ms Sitharaman, the Bridge Club of India has slammed its doors on you just now. The Council has insulted every player of bridge in India: it just said that the outcome of every game is decided by pure chance, with skill playing no role. But then, till recently, the Vatican held that the sun moves around the earth. Decrees do not alter reality.
The Council’s obtuse declaration runs foul of several Supreme Court rulings that demarcate games of skill from pure games of chance. If the Council’s decision is challenged in the courts, it would be struck down.
The Council has decided to tax online gaming’s turnover, rather than the value added by the gaming platform. When an online player of rummy, say, wants to join a game, he has to pay what is called the Contest Entry Amount. The CEA paid by all players is the gaming platform’s turnover.
The CEA has two elements, the table fee, or the platform fee, which accrues to the platform that holds the online game. This is typically 10 percent. The rest goes to form the stake. The stakes of all the players in a game combine to form the winning, which goes, naturally, to the winner, not to the gaming platform. The winning is subjected to income tax at the highest rate.
The platform fees form the gaming platform’s revenue, the Gross Gaming Revenue (GGR). Till now, GST has been paid on the GGR, although the tax department has raised claims on turnover, only to be foiled by the Courts. Most recently, the Karnataka High Court came out with a cogent verdict that not just invalidated an extortionate tax demand based on the turnover but also laid bare the illogicality of the tax demand.
GST on gaming turnover will work to depress overall tax collections. Let us see how. The 28 percent tax on turnover breaks down into 28 percent each on the two components of the turnover, the platform fee and the stake. This might surprise the tax department, but no company is set up to use its capital to pay tax. So, online gaming platforms will, while bearing the tax on the platform fee, deduct the tax on the stake from the stake itself. So, the tax will shrink the stake by 28 percent. That means the winning will shrink by 28 percent. The GST Council thus depresses the revenue available for the income tax department by 28 percent.
Income tax is levied at 30 percent plus cess. By taxing away a portion of the stake at 28 percent, the GST Council ends up denying Income Tax the opportunity to tax that portion at 30 percent. Clever, indeed.
The Future of Online Gaming in India
Those who play games of skill such as rummy online might be driven more by the chance to play than by the stakes they play for. But, to the extent that their winning amount now shrinks by 28 percent, overall play might come down. That would depress tax collections for both GST and Income Tax. This decrease in volume could kill some gaming companies and send their employees back to India’s army of the unemployed.
When certain assumptions lead logically to absurd conclusions, the premise has to be wrong.
If the logic of taxing the turnover is applied to stockbroking, GST would be levied not just on the brokerage but also on the value of the stocks traded to earn that brokerage fee. Using the same logic, when a bank processes a loan, the GST on the processing fee should be levied on the value of the loan plus the fee. Finally, if there is no distinction between games of skill and gambling, and it is fine to tax gambling, why not legalise betting on cricket and election outcomes, and raise good tax money?
Does that seem absurd to you?
The article was first published in Money Control as An Absurd Decision, GST Council on July 12, 2023.
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