Taxing gaming is no child’s play

TK Arun

“The contention that it matters not whether the player or some third person is staking money is not apposite considering the fact that the person who stakes do so based on the confidence that he has in his skills and not his luck.”

Indian agriculture is a gamble on the Monsoon. This cliché would have been sufficient ground for the Goods and Services Tax authorities to slap a tax of 28 per cent on the value of crop output if agriculture had not been kept out of the ambit of GST.

The GST authorities had raised a tax demand of Rs 21,000 crore on online gaming company Gameskraft Technologies Ltd, based on specious reasoning that would qualify anything that entailed risk, reward and money to be called gambling, making its proceeds eligible to be taxed, in their entirety, at the rate of 28 per cent. The Karnataka High Court, however, has stepped in to abort this bit of absurdity, with its ruling of May 11.

In its forthcoming meeting, the GST Council should be guided by this ruling when it considers the report of a working group that recommends taxing the online gaming industry on the entire amount it receives from contestants. However, its revenue from the so-called ‘contest entry amount’ (CEA) is only a fraction, typically 10 per cent, derived from the table fee or platform fee, called Gross Gaming Revenue (GGR). The rest constitutes the stake, which accrues to the winner and is taxed as income.

Getting the tax right

Video gaming is a huge and growing industry, several times as large as the total market for movies. Its worldwide revenue for 2022 is estimated at $200 billion. This explains the scale of and interest in acquisitions in the industry. Microsoft’s bid to acquire Activision Blizzard for $69 billion is being challenged by competition authorities in the US and UK, while the normally more fastidious European Union competition body has cleared it.

Online games such as Rummy or fantasy sports, in which people wager small amounts based on their skill in playing the card game or assembling the right team, balancing the quality of players and the budget constraint, are one segment of the ever-expanding online gaming universe. It is vital to get the taxation of even just one segment of online gaming right because the adoption and legitimation of a wrong methodology here could colour the taxation of other segments as well.

Many might consider video games to be a rich-world indulgence, if not a brain-stunting, time-wasting distraction for India’s young would-be CV Ramans and Sundar Pichais, unworthy of serious policymaking attention or space in the public discourse. Such people should sit up and take note that the world is not flat and the sun does not go around the earth.

Satisfying human wants, rather than bare necessities, drives much of economic activity, and entertainment rises in importance as economies prosper. Tourism is an indulgence for the traveller but a serious business for providers of tourism needs, generating valuable income, employment and tax revenue. That is the case with gaming as well. Online gaming is in its infancy in India and yet generates Rs 2,200 crore of GST revenue.

And gaming goes beyond entertainment. Increasingly, games are a part of the popular culture. They are a source of soft power. The Japanese and the Koreans punch above their weight among the world’s young, in part because of manga, anime and their percolation into gaming.

Health Benefits

Playing video games improves brain-body coordination at the elemental level. Some games train players to think strategically and collaborate. Playing games online keeps an increasing number of senior citizens not only preoccupied but also mentally alert, activating parts of the brain that tend to degenerate with disuse. As societies age, and the digital divide narrows across income and age groups, gaming would increasingly be part of elderly care.

Gaming is also different from many segments of entertainment for driving technological innovation. The microchips that are at the heart of Artificial Intelligence, with their massively parallel processing capabilities, were first developed to handle the demanding graphics of gaming. The gaming industry is also the driving force behind advances in three-dimensional graphics and virtual reality.

These innovations took place outside India, principally because India did not have much of a gaming industry. Now, one is growing, at a time when 5G mobile communications and Artificial Intelligence are taking off and interacting with each other at multiple nodes, to produce new things that were not possible before. This offers India opportunities for new jobs in hard technology, design, graphics, story-telling, and myriad other fields, to further extend the sweep of India’s soft power and spawn diverse innovation.

There are multiple reasons to not choke the life out of India’s burgeoning gaming industry with obtuse taxation, apart from the constitutionally guaranteed right of Indian citizens to pursue any trade or profession of their choice.

Does the tax claim dismissed by Justice Krishna Kumar of the Karnataka High Court deserve to be called obtuse? Consider the general principles the tax department relied on to justify their tax demand, in their submission to the High Court. The revenue department concedes, gracefully, that Rummy is, indeed, a game of skill – after all, the Supreme Court has itself held it to be one. But it then argues that since the outcome of the game is uncertain when a player wagers money on the outcome, he is gambling.

“The act of gambling requires three elements, viz, (a) staking of an amount, (b) an element of uncertainty i.e., chance and (c) a reward which is usually higher than the amount staked. In short, gambling is the staking of money for a chance to win more money…” The first sentence describes the necessary conditions to establish gambling, which is perfectly in order. The second sentence asserts a definition of gambling that would include, in its broad sweep, any entrepreneurial activity.

Skill Vs Chance

The submission goes on to say that “Be it a game of skill or a game of chance, both the games have one aspect in common and that is the uncertain outcome of the game. No player of the game knows with certainty the outcome of the game and it always remains an uncertain event until the game concludes. Therefore, placing stakes on an outcome of a game, irrespective of the game being of skill or chance, amounts to betting and gambling.”

Justice Krishna Kumar brings out the fallacy of this argument, pointing out that when a player bets that he would win, he is counting on his own skill and expertise, and this is entirely different from speculating on the outcome of an event that he is in no position to influence. “The contention that it matters not whether the player or some third person is staking money is not apposite considering the fact that the person who stakes do so based on the confidence that he has in his skills and not his luck.”

Since betting on a game of skill by the player is different from gambling, the GST law identifying the winnings as actionable claims liable to be taxed on the entirety at the rate of 28 per cent does not apply. That leaves the question of whether to levy the tax on the gross gaming revenue or the contest entry amount that includes both the stake and the table fee, only the latter of which constitutes the fee for the service of organising the game online.

This is similar to asking whether GST on a securities trade should be levied on the brokerage or the value of the trade comprising the value of the security and the cost of brokerage. Sensibly, GST is levied only on the brokerage service, not on the value of the trade. The tax base should, clearly, be the gross gaming revenue.

What is the appropriate rate of tax on online games? Gaming is not an essential activity and is eligible to be taxed at the higher end of the rate spectrum. The fact is that 28 per cent is an excessive rate for most goods and services and should be brought down. But there is no case for a concessional rate of tax on gaming.

Similarly, there is no case for exempting any income made from gaming from the remit of taxation at the earner’s appropriate rate of tax. Even if it is one rupee, it is a simple matter for the algorithm to deduct tax at the rate of 30 per cent and pay out the rest, filing data with the income tax department, so that the winner could claim a refund, if he were eligible to be taxed only at 20 per cent, while filing returns. But this, of course, is on the income tax side.

On the indirect tax side, the Karnataka High Court verdict should settle the debate. Like other people, taxmen also hear it said that death and taxes are the only two certain things in life. Taxmen have the responsibility to make sure death and taxes remain separate things, and not convert tax into the instrumentality of death of an infant industry.

The article was first published in MoneyControl as Karnataka High Court provides clarity on taxing online games on May 24, 2023.

Read more by the author: The Dim View on Karnataka.



    IMPRI, a startup research think tank, is a platform for pro-active, independent, non-partisan and policy-based research. It contributes to debates and deliberations for action-based solutions to a host of strategic issues. IMPRI is committed to democracy, mobilization and community building.

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  • TK Arun

    TK Arun is a Senior Journalist and Columnist based in Delhi.

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