GST Council decision on online gaming: Industry voices concerns and hopes for future review

The gaming industry in India has experienced impressive growth in the last two years, outperforming a lot of leading markets in terms of userbase, technology, and monetization options.

However, the introduction of the new GST tax slab and valuation methodology has raised concerns within the sector. Industry stakeholders fear that the significant rise in GST could have a negative impact on the overall growth of the industry. Small and medium players, operating on slimmer profit margins, are expected to be the worst hit. Despite the Finance Minister's clear stance on the tax decision, stakeholders remain hopeful that the government will consider the potential challenges faced by MSMEs in the industry.

“This was an expected move from the government but at an industry level it is expected to affect online gaming both RMG and non RMG on their user base, revenues and overall gaming experience,” said Soham Thacker Founder CEO Gamerji.

The nearly 4X rise in GST will shackle the industry’s growth as per Siddharth Sharma, SVP- Business Strategy, Head Digital Works (A23) and businesses will have to we pivot their business models to adapt to the new tax regime. While re-strategising business models might be an option for the larger profit making players for the smaller online gaming enterprises, the weight of this taxation could prove to be insurmountable as per stakeholders.

“These businesses typically operate on slimmer profit margins and possess fewer resources when compared to their larger counterparts. The cumulative effect of these taxes could severely curtail their ability to maintain operations, invest in technological advancements, and provide enticing incentives to attract gamers,” said Indie fantasy platform Super4’s founder, Rohit Bansal.

According to Bansal, it is imperative that the GST Council reevaluates this decision and supports a more equitable approach that acknowledges the unique challenges faced by smaller industry players. Sudipta Bhattacharjee, Partner, Khaitan & Co said many smaller start-ups in the business may have to shut shop even before the expiry of the review period of six months.

“The problem remains that GST, despite being a tax on supply of goods/service, is being levied on a value that is much higher than the actual revenue earned by the online gaming platforms for their supply of facilitation services to players. Though a reconsideration was sought by the State of Delhi, it was unfortunately overruled,” Bhattacharjee said.

Investors in this sector may continue to be concerned given the ‘blow hot, blow cold’ approach towards online gaming according to her.

“On the one hand, the sector is lauded and encouraged through ‘light touch’ regulations by the MeITY and on the other hand punitive taxation is reaffirmed to be imposed under GST (despite several pleas from the sector) by levying the same level of GST as ‘betting and gambling’ on online games of skill, ignoring decades of settled legal position that games of skill cannot be equated with gambling,” she added.

In spite of all the clarifications provided by the finance minister in the press briefing post the August 2 GST Council meet, some areas still remain unexplained.

Technology and gaming lawyer Jay Sayta pointed out, that while it 28 percent GST will be applicable at the stage of purchase of chips or deposit into the online gaming wallet and not on winnings reinvested to enter future games or contests, whether chips or deposits that are returned by the customer or withdrawn would be treated as refund of goods and eligible for offset or credit of GST.

Further, the Revenue Secretary has also indicated that the department intends to pursue claims on retrospective dues and has filed an appeal in the Supreme Court against the Karnataka High Court order that quashed the Rs 21,000 crore GST notice against Gameskraft.

“If the department is amending the law on a prospective basis, it is entirely irrational and illogical to pursue claims for retrospective dues for which there is currently no legal provision,” Sayta said.

Finally, the fact that there was no complete consensus or unanimity within the council and that the possibility of review of the decision after six months of implementation has been left open is a sign of the complexities involved in the issue.

“Hopefully, there will be a complete review of the decision in the second half of 2024 and the industry’s demands to tax on Gross Gaming Revenue (GGR) would be positively considered in the future,” he added.