By Aruna Sharma
The Central and State Goods and Services Tax (Amendment) Act, effective October 1, 2023, marks a significant shift, specifically addressing the taxation of casinos, horse racing, and online gaming. The amendments provide a framework for the taxation of ‘online gaming’ and ‘online money gaming,’ bringing clarity to the taxation of these activities.
In August 2023, the GST Council modified the law to specify that starting from October 1, all online games involving bets, regardless of whether they are games of skill or chance, will be subject to 28 percent GST on the entire value of the bets placed, rather than on the gross gaming revenue (GGR) which is the difference between the amount of money players bet minus the amount that they win. As a result, parliament amended the tax laws, startling the entire industry and its stakeholders.
Since the council’s decision, online gaming companies stand accused of tax evasion and short payment of taxes from 2018. Consequently, Directorate General of GST Intelligence (DGGI) served tax notices retrospectively to reclaim pending taxes. Experts believe this move could potentially spell the demise of the entire industry.
In the ongoing legal feud between the government and industry stakeholders regarding legitimacy of the current taxation framework, the apex court is expected to announce its long-awaited verdict on the Gameskraft v/s DGGI case on 15th December 2023. The judgment will decide the legality of the tax notices served on iGaming companies, claiming over Rs1 trillion in unpaid dues. iGaming companies have filed petitions calling these claims illegal and arbitrary.
Balancing taxation and growth
The silver lining for the iGaming industry is that the MeiTY (Ministry of Electronics and Information Technology) has clearly defined rules for distinguishing online games of skill from those of chance. Accordingly, the Self-Regulatory Bodies (SRBs) to be set-up by iGaming companies can decide which category a specific game falls under. These bodies should be in constant dialogue with iGame developers for peer group reviews and consultations, adding to the credibility of the iGaming industry.
A key aspect of this debate is that games of skill do not metamorphose into games of chance if played online. Thus, the criteria for distinguishing between games of skills and chance should be pondered upon at the earliest as not differentiating between the two can give rise to problems.
The points to consider in deciding whether a game is a game of skill (or not) can be as follows:
Is there a correlation between experience and success? A study has revealed that experienced players consistently outperformed their less-experienced counterparts, suggesting a strong correlation between experience and skill.
Do skills improve over time? The study also found that a user’s skill improves over time as they play more skill-based games. This translated into more wins.
Sensory motor control: This includes critical aspects such as hand-eye coordination, balance, reaction time, rhythm, and the proficiency with which players handle their input devices, such as a mouse and keyboard. This also improved with experience in skill-based games.
Cognition: Does the game require planning, memory, problem-solving skills, and the ability to manage challenges to perform consistently.
Social competence: in games of skill, players who actively engage with their teammates and offer mutual support tend to do better.
Personal competence: players who recognise their strengths and weaknesses and adapt their gameplay accordingly have an advantage in skill-based games.
Knowledge of the game: Understanding the game’s design, its mechanics, and the ability to optimise the gaming device or interface are key to performance in skill-based games.
The industry is expected to grow at a higher CAGR , but retrospective taxation on all skilled-based games will badly hit the iGaming ecosystem.
Additionally, a poor tax policy shall result in the development of grey markets and a shift to other geographical zones with more sustainable policies. Therefore, to help ensure the Indian iGaming industry becomes the second-largest in the world, we need to revisit the applicable GST.
Aruna Sharma is a practitioner development economist and retired secretary who worked with the Ministry of Electronics and IT and Ministry of Steel, Government of India.