The industry has the potential to scale quickly and become a significant contributor to government’s vision of a Trillion-dollar digital economy.
Legality of online gaming business in India
Every industry needs a robust regulatory and legal environment, devoid of uncertainties to achieve its true potential and ensure that the business is able to scale quickly. To determine whether a game comprises a game of skill or a game of chance has wide consequences for any industry player. It is often the determining factor for legal implications on the business operations. Whether a game classifies under chance or skill depends on the facts and circumstances of each case.
A game of chance translates to betting or gambling activities and attracts a higher GST rate of tax vis-à-vis game of skill. Therefore, the online games being offered by industry players shall qualify as game of skill and thus, legal in India. The differentiation vis-à-vis betting and gambling impacts the Indirect Tax implications.
GST on online skill games: How online gaming is taxed in India
Online games operate either on the rake fee model wherein the gaming platform charges a rake fee for facilitating the play of games or freemium models wherein the gameplay is free but additional features may require the user to purchase certain items for a monetary price.
The activity of the online gaming platform to enable gameplays against a rake fee gets covered under the ambit of ‘supply’ under Goods and Services Tax (GST) law. Therefore, GST would be applicable on the revenue accruing to industry players.
A rationale imposition of Goods and Services Tax (GST) is important for sustaining this industry.
The settled position in law has been the classification of online games as game of skill and thus, outside the purview of betting and gambling. However, the industry being in nascent stage and lack of specific categorisation of online games as game of skill by the government has resulted in ambiguity. The inconsistencies among state laws related to scope of betting and gambling and prohibition of even rummy games in some states has further aided to uncertainty. The ambiguity has the potential to raise unnecessary tax demands beyond the rake fee earned by online gaming platforms. Such aggressive litigation would significantly impact the sustainability of the online gaming business.
The lack of clear valuation principles and ambiguities in levying GST on the entire stake value vis-à-vis the rake fee element has caused regulatory uncertainty amongst industry players and has dampened the industry to an extent.
To enable the online gaming industry in realising its peak growth potential, it is imperative that the GST regime for Online gaming Industry is kept rational and at par with other technology platforms.
Considering the market size and future growth projections, the online gaming industry is expected to be a significant contributor to the economy. Given the potential and the economic contribution, it is important to iron out the ambiguities and provide a stable tax regime at a time when the industry is nascent and only about to grow from here.
It is imperative to analyse the GST implications and impediments therein that may impact the business operations for the industry as a whole. It is also worthwhile to evaluate the global best practices for the taxation of the industry and provide much-needed clarity on aspects related to valuation and applicable GST rate.