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India’s online gaming industry faces challenges

BusinessIndia’s online gaming industry faces challenges

Zeal with which indirect tax authorities are serving notices to legitimate operators is unfounded.

Is someone seriously thinking about the online gaming industry? Not exactly. The Union Budget continued its focus on steering the economy towards growth where the ease of doing business in India was a critical component of the proposal. India’s Amrit Kaal vision pegs the FDI growth to a whopping $1 trillion by 2047.
While there have been over 300 reforms introduced across 72 action points for state governments to develop investor friendly ecosystems introduced under Business Reform Action Plan (BRAP), there are certain contradictions that continue to baffle businesses and the investors. A great example is the online gaming industry. At one end of the spectrum, MeitY has been appointed as the nodal ministry which almost at lightning speed came out with the draft rules for the sector, held stakeholder consultations and is expected to share the final rules soon. To add to this, the recent list of banned apps includes gambling and offshore operators, which is again a positive step towards putting brakes on the rapidly growing illegitimate gambling industry.
But somehow, the stance taken by DGGI doesn’t add up to these constructive steps taken by the Union government to enable the nascent online gaming industry. Prime Minister Narendra Modi has spoken about the significance of gaming as a sunrise sector in India’s growth on more than one occasion.
But it is not working on the ground. Why? The zeal with which India’s indirect tax authorities are serving notices to the legitimate operators in the country is unfounded. This is a gross misreading of the law and also shows indifference to the multiple jurisprudence that exists in the country as well as the efforts undertaken by the Ministry of Electronics & Information Technology to introduce a policy framework which can support the industry’s growth.
The current law states that the total pool is taxable only if the underlying activity is deemed to be “betting and gambling”. The Supreme Court and various high court judgments have time and again established that games of skill do not constitute gambling. They have ruled that online games of skill are no different from those played offline.
While a couple of gaming start-ups have received a notice from the DGGI of tax liabilities running in multiples of their overall revenue, and have been given a stay by the respective High Courts, the industry overall has been accused of Rs 23,000 crore tax evasion, which is higher than the combined revenue of the industry itself.
During one of the recent cases with regards to the DGGI notice heard at the Rajasthan High Court, the Court noted: Thus when the matter is so settled by various courts, the issuance of the impugned show cause notice is nothing but an abuse of the process of law.
It will not come as a surprise if the other legitimate gaming operators receive show cause notices from Directorate General of GST Intelligence (DGGI) alleging that they are in violation of the law and evading taxes. All this will only lead to intense court cases and confusion.
If this wasn’t enough, in the context of the much-anticipated GST council decision on taxation on casinos, horse racing and online gaming (which has been ongoing for a few months now), the Council is expected to take it up in the upcoming meeting.
This is not all. While detailed stakeholder consultations and GoM discussions have taken place, the final decision with regards to rate of taxation (as of now online skill gaming is taxed at 18 per cent), and the amount on which taxation is to be levied (at present tax is levied on the commission earned by online skill gaming operators; a concept known as Gross Gaming Revenue (GGR)) is pending, Recent statements by the CBIC Chair—as per reports in the media—do not boost industry confidence.
Considering that the Karnataka High Court has had detailed arguments on the ongoing case against the DGGI notice for tax evasion where industry federations have also impleaded along with the company in question, and looks into the particular argument around taxation, wouldn’t it only be prudent for both the DGGI and the GST Council to wait for the Karnataka High Court to give its judgement instead of imposing erroneous taxation which will only debilitate the legitimate online gaming industry. The Finance Ministry must sit up and take notice.

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