If the valuation mechanism is changed to a tax on the Contest Entry Amount (CEA), it renders the entire industry unviable.
NEW DELHI: The Group of Ministers (GOM) deliberating for the past several months on the taxation on online gaming industry has not reached a complete consensus as per the report submitted on 15 December 2022, ahead of the 48th GST Council Meeting on Saturday.
The report was not included in the agenda due to paucity of time. It is expected to be discussed in the next Council meeting.
The proposed increase from the existing 18% GST to 28% GST already offers a significant revenue growth for the exchequer. The industry is open to the increase in the tax bracket.
But the problem lies elsewhere. If the valuation mechanism is changed to a tax on the Contest Entry Amount (CEA), it renders the entire industry unviable as the increase in taxation burden for online gaming platforms would be upwards of 1000 percent. In addition, this change in valuation effectively taxes the operator above and beyond their revenue stream.
Earlier, in September this year, the Karnataka High Court had stayed an intimation issued by the Directorate General of GST Intelligence to an online gaming company, demanding Rs 21,000 crore retrospective tax, charged at 28% on CEA.
A judgement on the case is expected to be delivered soon and would likely guide future discussions on taxation policies pertaining to the skill gaming industry.
The taxation on Contest Entry Amount (CEA) would effectively mean a death sentence for legitimate businesses operating in the industry, killing any potential growth that the sector could deliver.
Worse, it will shift the burgeoning user interest towards illegitimate avenues and increase proliferation of grey market and offshore operators like fairplay, 1XBAT, FUNBB.net Parimatch, RajaBets, and DafaNews etc., who do not pay any taxes in India, thereby thwarting significant revenue loss to the exchequer.
The ongoing uncertainty around the taxation policy also poses a threat to the investor confidence in the industry.
Earlier in the year, global venture capital investors in Indian gaming startups had written to the Indian government requesting to maintain the status quo on taxation. Currently, the total Indian gaming portfolio for key global investors is valued at over $10 billion.
The investors in their letter had said that in their experience “both in Europe and the Americas most regulators have realized that on the internet where there are no national borders, citizens of a country are best served by a regulatory regime that promotes the local gaming industry with constructive tax policy and a regulatory structure to protect users with focus on fairness and responsibility.”
The online gaming sector is presently taxed at 18% GST on Gross Gaming Revenue (GGR) or platform fee charged by the online gaming platforms. Globally too, most major economies levy tax on Gross Gaming Revenue, which is the revenue earned by the gaming companies. The benchmarks for GST collection internationally vary from 5 to 20 percent on Gross Gaming Revenue.
The interim proposal offered at the 47th meeting of the GST Council held earlier this year recommended that GST on online gaming be increased to 28% and for it to be levied on Contest Entry Amount (CEA) instead of GGR.
However, due to concerns raised by some of the members, finance minister Nirmala Sitharaman had asked the GoM to deliberate on the matter further and come back with recommendations.
It is important to note that gaming is not a pushover industry.
The industry has been recognized for the potential that it offers, and Prime Minister Narendra Modi has expressly stated his vision of India becoming a Gaming Superpower.
The Online Skill Gaming (OSG) Industry contributes to 70 percent of India’s mobile gaming revenue and is touted to become a significant contributor to India’s vision of becoming a Trillion Dollar Digital Economy.
As per industry estimates, the sector has the potential to increase revenue generation from the current Rs.15,000 crores to over Rs.40,000 crores by 2025. The industry has witnessed significant investment from domestic and foreign investors given its growth potential and three Indian gaming startups, including Games24x7 have already turned unicorns.
While Online Skill Gaming (OSG) has been growing at approximately 38 percent CAGR over the last few years, the industry awaits progressive regulations and incentivized policies for sustained growth.
According to the State of India Gaming FY 2022 report released at the India Game Developers Conference (IGDC) Summit, India has already crossed the half-a-billion mark with 507 Mn gamers in the country today, out of which 120 million, almost one-fourth, are paying users.
India-based content has also been growing in popularity with 80 per cent of the country’s gamers showing a proclivity to play games based on Indian intellectual property.
The online gaming industry has demonstrated potential to attract foreign and domestic investments, create employment and generate revenue for the exchequer. With global attention towards gaming, the Indian gaming industry can provide opportunities to harness domestic talent, support allied industries and export Indian-made IPs in the global gaming environment, contributing significantly to India’s potential of becoming the world’s third largest economy by 2030.
This has been a significant year for the industry with the formation of the AVGC Task Force under the Ministry of Electronics and Information Technology (MeitY), as announced in the annual budget 2022-23, to focus on developing regulatory frameworks specific to this nascent sunrise sector.
All eyes on the next GST Council meeting.