The sudden increase in GST from 18% to 28%, applied retrospectively to the total amount wagered (including prize money for winners in Real Money games), has had a significant impact on the financial health and operational capabilities of the online gaming industry. As a response to the arbitrary and excessive tax notices, the industry challenged the DGGI decision in the courts.
However, the stay on the notices by the Supreme Court has curtailed the immediate financial harm and operational disruptions for iGaming companies. Both the industry and gamers hoped to avoid immediate repercussions of 28% GST, and consequently the stay on the tax notices. This prevented the high tax costs from being passed on to gamers or included in input invoices.
Current scenario
Recognizing the gravity of the excessive tax notices served to this sunrise sector, the Supreme Court has consolidated all related cases and plans to hold a hearing as soon as the courts open post-summer break, i.e., in July 2024. The outcome of this hearing will be critical to the industry’s future viability and profitability, holding great significance in the imposition of retrospective taxes by the government authorities.
Currently, the iGaming platforms have not passed the potential additional cost on to players or reflected in input invoices. However, if the retrospective application of the GST increase (effective since Oct 2023) is allowed, the online gaming industry will face significant financial difficulties. The industry will be unable to recover these costs from players or through input invoices, ultimately making online gaming companies responsible for the entire financial burden. This scenario could significantly reduce profitability, resulting in substantial financial losses and operational difficulties.
For many businesses, this could mean operating at a loss, which is unsustainable in the long run, especially for the MSMEs. The increased financial strain may force some businesses to downsize, reduce services, or even close entirely. The industry’s overall health would be jeopardized, potentially resulting in job losses, reduced innovation, and decreased investment. The broader impact may stifle growth and potential investments in India’s online gaming market, undermining the country’s potential as a global hub for online gaming.
Industry’s expectations
In response to the unexpected GST increase, the online gaming industry has sought a variety of critical relief measures.
Firstly, it has advocated for the establishment of clear parameters to distinguish between skill-based and chance-based games. This distinction is important because it influences the applicable tax rates and regulatory framework.
Secondly, the industry is advocating for different GST rates for these two categories, claiming that games of skill should not be taxed as heavily as games of chance because of their unique nature and contribution to mental and strategic development. In this context, it is crucial to recognize that the negative impacts often blamed on the gaming industry are predominantly caused by illegal gambling operations, not legitimate gaming platforms that are willing to abide by the country’s tax laws and regulatory framework.
Furthermore, the industry also demands the retrospective application of the tax increase be removed, which has caused significant financial uncertainty and potential liabilities. Instead, the prospective application would likely allow the industry to enhance its innovation capabilities to further promote responsible gaming.
Finally, the industry seeks the cancellation of the GST levied on the total amount wagered. This tax is contentious because the total wagered amount includes both entry fees and prize money, which do not fit neatly into the definitions of goods and services. Addressing these concerns is critical to ensuring the financial viability and regulatory clarity of India’s online gaming sector.
Looking ahead
If the Supreme Court denies the requested relief, the consequences for the online gaming industry could be severe. The industry may be driven underground, with more businesses operating in gray areas. This is especially concerning given India’s sizable market, with 66 million smartphone users constituting a significant customer base for online gaming. This shift would undermine fair play, reduce tax revenue, and discourage new investments in the sector. As a consequence, India may miss out on the opportunity to become a global hub for online gaming, leading to higher economic growth and innovation.
Dr. Aruna Sharma is the Development Economist and retd Secretary GoI. Views expressed are personal.