India's booming online gaming industry faces challenges in transition to 28 percent GST bracket

By Aviral Kapoor

Online gaming in India has witnessed a meteoric rise, becoming an integral part of the country’s digital entertainment landscape. According to Invest India, the gaming sector has transformed from being a mere pastime to a mainstream entertainment source, with a projected market value of $3.9 billion by 2025. The proliferation of smartphones, affordable internet, and a young demographic have fuelled this growth, making India one of the top five mobile gaming markets globally.

However, the journey of online gaming in India is not without its challenges. The introduction of a 28 percent GST levy threatens to significantly impact the sector, with several companies already announcing layoffs due to the financial strain. This tax imposition has prompted industry stakeholders to anticipate layoffs, valuation cuts, and even potential shutdowns of smaller firms.

Yet, amidst these challenges, there are opportunities. The online gaming industry currently employs over 100,000 individuals, with projections estimating the creation of 1.6-4 lakh additional jobs in the next two to three years. These jobs span various domains, including tech, programming, testing, animation, design, and artistry.

As the online gaming sector navigates through these regulatory and financial challenges, it becomes imperative to understand the broader implications for stakeholders and the way forward for this burgeoning industry.

Current regulatory framework

The introduction of the Information Technology (IT) Rules by the central government in 2021 marked a significant shift in the digital landscape of India. These rules, while aiming to regulate intermediaries and digital media, were met with mixed reactions. On one hand, they were lauded for bringing clarity and structure to the rapidly growing online sector, especially with the inclusion of guidelines for online gaming in the 2023 amendments. The recognition of the online gaming sector, one of the fastest-growing tech-based industries in India, and the subsequent efforts to regulate it showcased the government’s commitment to adapting to the digital age.

However, the broadened definition of online games, encompassing all internet-offered games, raised concerns about potential overreach and the stifling of innovation. While the classification of entities offering these games as Online Gaming Intermediaries (OGI) brought a semblance of order, the stringent verification processes mandated for Online Real Money Games by Self-Regulatory Bodies (SRBs) were seen by some as a potential barrier to entry for smaller developers.

The Gaming Amendments of 2023, though comprehensive, also brought to light the delicate balance between regulation and freedom. The empowerment of SRBs to create frameworks for responsible gaming, protection against harm, and adherence to national guidelines was a positive step towards self-regulation. However, the central government’s retained power to intervene, suspend, or deregister SRBs raised concerns about autonomy and the potential for bureaucratic red tape.

Furthermore, while the emphasis on user verification and the prohibition on financing for Online Real Money Games aimed to protect users, it also posed challenges for platforms in terms of implementation and user experience. The fusion of obligations for OGIs with significant social media intermediaries blurred the lines between different digital entities, leading to debates on the appropriateness of a one-size-fits-all approach.

In essence, the Gaming Amendments of 2023, while marking a pivotal step in India’s online gaming regulatory journey, also underscored the challenges of crafting regulations that cater to diverse stakeholders. The need for a dynamic, adaptive, and consultative approach remains paramount as the digital landscape continues to evolve.

TDS implications for players

In a significant shift in the taxation landscape for online gaming, the Central Board of Direct Taxes (CBDT) has rolled out specific guidelines detailing the mechanism for online gaming companies to deduct tax from players’ winnings. Effective from April 1, 2023, these guidelines mandate that online gaming companies must deduct Tax Deducted at Source (TDS) on every rupee earned from winning an online game. This is a marked departure from the previous financial year (FY 2022-23), where TDS on winnings from online games was applicable only if the winning amount exceeded Rs 10,000 in a financial year.

The tax will be deducted under the newly introduced Section 194BA of the Income Tax Act, 1961. The rate for TDS on winnings from online games has been set at 30 percent. This tax will be deducted either at the time of withdrawal of the winnings by the player or, if there is no withdrawal, at the end of the financial year. Furthermore, the CBDT has clarified that the Goods and Services Tax (GST) will not be included when calculating winnings from online games for the purpose of TDS under Section 194BA.

For players, this means that a significant portion of their winnings will be withheld as tax, potentially impacting their overall earnings from online gaming. However, the introduction of these guidelines brings transparency and clarity to the taxation process, ensuring that both players and gaming companies are clear about their tax obligations. For the companies, the compliance with respect to deduction of TDS has increased significantly.

GST implications on online gaming companies

The online gaming industry in India has been undergoing significant changes, especially in the realm of taxation. Prior to the recent amendments, the Goods and Services Tax (GST) regime had a different structure for online gaming. However, in a transformative move, the GST Council decided to impose a 28 percent GST on online gaming, effective from October 1, 2023. This decision was based on the full face value of bets at the entry level, marking a significant shift from the earlier tax regime.

This transition to a higher tax bracket has not been without its challenges for the industry. The Directorate General of GST Intelligence (DGGI) has issued pre-show cause notices to several online real money gaming (RMG) companies, alleging evasion of GST to the tune of about Rs 55,000 crore. Notably, fantasy sports platform Dream11 received a GST notice of over Rs 25,000 crore, making it one of the largest indirect tax notices served in the country. Other major players have also been served notices. The cumulative GST demand from RMG companies is expected to touch a staggering Rs 1 lakh crore, as per industry insiders.

Such hefty tax demands have raised concerns about the future growth and sustainability of the online gaming sector in India. The imposition of a 28 percent GST, coupled with the massive demand notices, could potentially deter new entrants from venturing into the online gaming space, thereby stifling innovation and competition. Existing companies might also face financial strains, which could lead to downsizing or even closure of operations for some. Furthermore, the high tax rate could result in increased costs for consumers, making online gaming less affordable for the masses.

On the other hand, the government’s perspective is rooted in ensuring that the online gaming industry contributes its fair share to the national exchequer. The move to levy a higher GST is seen as a way to regulate the rapidly growing sector and bring in additional revenue. However, the industry argues that a more moderate tax rate would be conducive to its growth and would still result in substantial revenue generation for the government.

The way ahead

The online gaming sector in India stands at a crossroads, poised between unprecedented growth and regulatory challenges. As the digital landscape continues to evolve, the industry’s resilience and adaptability are being tested by the ever-changing regulatory and taxation frameworks. The introduction of a 28 percent GST and the stringent TDS guidelines reflect the government’s intent to ensure that the sector contributes equitably to the nation’s coffers. However, it’s imperative to recognise the potential repercussions these decisions might have on the industry’s vibrancy and innovation.

While the government’s efforts to regulate and tax the sector are understandable from a revenue generation and user protection standpoint, it’s crucial to ensure that these measures do not stifle the industry’s potential. The online gaming sector, with its vast employment opportunities and contribution to the digital economy, deserves a regulatory environment that fosters growth while ensuring accountability.

The writer is partner, Alagh & Kapoor Law Offices.