GST Council levies 28% tax on online gaming: Experts warn of massive impact, say it could kill the industry

The Goods and Services Tax (GST) Council in its 50th meet held on Tuesday recommended that online gaming along with casinos and horse racing be taxed at the uniform rate of 28% on full face value..The Council decided that there should be no distinction between “games of skill” and “games of chance”."GST Council recommends Casino, Horse Racing and Online gaming to be taxed at the uniform rate of 28% on full face value," said a presser issued by the Union Ministry of Finance..Industry experts are criticising the measure, calling it a “self-goal” that would “kill” India's skilled online gaming industry. .Chief Strategy Advisor to the Founders of Gameskraft, Amrit Kiran Singh said,“It negates all the good work that the Modi government has done to support the industry by appointing MEITY as the nodal ministry for this industry, notifying rules that now govern the industry, allowing for the formation of Self Regulating Bodies (SRBs) to regulate the industry, addressing the ambiguity in TDS deduction rules,” he said..Singh underlined that the decision of the GST Council was "not in the national interest" as it will destroy a significant portion of successful companies in India's start-up ecosystem. .“Unfortunately, it also appears to show that the different limbs of the government are not in sync. One must remember that over 2 lakh jobs have been created by the industry. And this is just the tip of the iceberg. Today, India has only 1% of the world market share. This could easily grow to 5 and 10% rapidly with India being an IT powerhouse. USA and China are the market leaders with 23% and 25%, respectively. This is a borderless industry and over-taxation in India will only support the cause of the overseas gaming companies and encourage Indian industry to migrate overseas,” he cautioned..Khaitan & Co Partner Sudipta Bhattacharjee noted while the 28% rate was “detrimental” to the online gaming industry, charging on full value would hurt the gaming companies to an extent that could even lead to their extinction. “This is completely against the vision of the government to promote online gaming in India. The findings of the Karnataka High Court in the Gameskraft case with respect to the distinction between a game of skill and a game of chance has not been appreciated. It will need to be seen if the prescribed methodology to tax online gaming will pass the test of constitutionality. In any case, this cannot be implemented retrospectively,” he said. .Bhattacharjee added,"The setting up of the appellate tribunals is a welcome move and may help in reducing the burden on the High Courts and effective disposal of the pending GST litigation. However, the success or failure of the tribunals will depend on the staffing of adequate members which has been a challenge with earlier tax tribunals.”.In the opinion of technology and gaming lawyer Jay Sayta, the decision to obliterate the distinction between games of skill and chance and to impose a flat 28% tax on face value would have a “massive impact” on the industry.At the time the draft Online Gaming Rules were released, Sayta had noted that though an online game was defined as one having “deposits” and “winnings”, games of skill and chance hadn't been defined in the context of gambling and betting. “As it has been decided by the GST Council that amendments have to be made to Entry 6 of Schedule III of the CGST Act to exclude online skill-based gaming from the ambit of actionable claims, correspondingly all 28 states will have to amend their state GST laws to reflect this position. It will take at least 5-6 months to bring into force this changed rate and manner of valuation of taxation for online skill gaming industry,” he argued.According to Sayta, it was certain that the industry would challenge these amendments to the GST laws before the courts, as and when they are brought into force..In a public statement, gaming company Games24X7 expressed “deep distress” over the Council’s decision and outlined that taxing the contest entry amount (CEA) would effectively create a "hostile environment for legitimate domestic platforms”. This is an unrealistic tax burden which was counterintuitive to the measures that the government has taken to promote this sunrise sector, the company said.“Imposing GST on CEA will render the legitimate online gaming industry unviable, effectively driving consumers towards offshore and illegal platforms that pay no taxes, resulting in loss of taxes and outflow of foreign exchange. Further, this will also lead to loss of employment for thousands working in this sector,” it stated.The company, therefore, urged the government to reconsider its decision and work with industry stakeholders for a more "suitable taxation model” that supports “sustainable growth for the industry”..Earlier this year, the Central government proposed the introduction of online gaming regulations in the form of amendments to the Information Technology. These draft Rules were notified a few months later. Among the highlights, the draft Rules defined a gaming platform as an “online gaming intermediary” which will have the games registered with a “self-regulatory body” comprising a board of directors or the governing body. The regulatory body was proposed to be registered by the ministry upon an application made by it.