3 minute read 12 Aug 2021
Online gaming in India

Online gaming in India – the GST conundrum

By EY India

Multidisciplinary professional services organization

3 minute read 12 Aug 2021
Related topics Media and entertainment Tax

The regressive taxation of the online gaming sector may result in making the business unsustainable in India.

Online gaming in India

Sports and gaming have been a traditional source of rejoice, recreation and engagement for players and spectators alike. Within it, online gaming provides avenues for an on-demand, real-time gameplay without the limitations of a physical venue and time zones. COVID-19 and the resultant social distancing norms have further forced the masses to explore alternative means of recreation and social engagement and in turn, aided the growth of online gaming.

The market size and estimated growth numbers hint a steady growth trend wherein global online gaming revenue is estimated to grow from US$38 billion (approx.) in 2019 to US$122 billion (approx.) by 2025. On similar lines, the domestic market for online gaming is estimated to grow from US$906 million in 2019 to over US$2 billion in 2023 representing a CAGR of 22% approx. Therefore, the domestic industry has the potential to scale quickly and become a meaningful contributor. Digitizing the gaming industry has led to tapping into an otherwise unorganised sector and brought more accountability.

The likelihood of the youth being tech savvy (as compared to older sections of population) and thus, embracement of online gaming augurs well for the growth of the industry in India in the time to come. The market size and projected growth indeed point to this trend.

Global online games market size
India online games market size
The industry has the potential to scale quickly and become a significant contributor to government’s vision of a Trillion-dollar digital economy.
India’s online gaming segment

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.
Bipin Sapra
EY India Indirect Tax Partner

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. 

Summary

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.

About this article

By EY India

Multidisciplinary professional services organization

Related topics Media and entertainment Tax