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Implications Of The 28% GST Imposition On Online Gaming In India: Post-Trimester Analysis

Last year, the Indian Parliament imposed a 28% Goods and Services Tax (GST) on online gaming. The umbrella term of 'online gaming' includes online games, horse racing, and casinos. This decision, which placed online gambling under the highest tax band, has had a relatively large impact on the players in this emerging market as well as on the larger legal and economic environment.

Once the courts open up next month in July, we will see the Supreme Court addressing a pile of appeals against the imposition, while at the same time, the GST Council has scheduled a review on the matter. But before that happens, through this article we shall look at the implications of the decision after almost a year.

In its 51st meeting on August 2, 2023, the GST Council recommended the imposition of a 28% GST on online gaming, casinos, and horse racing. This recommendation was subsequently approved by the Parliament through amendments to the Integrated Goods and Services Tax (Amendment) Bill, 2023, and the Central Goods and Services Tax (Amendment) Bill, 2023.

Although the government may have implemented a high tax rate for multiple reasons, the primary rationale was to align the taxes of similar industries; putting in place a flat tax rate will help businesses comply with the laws more easily and level the playing field. The second objective was to prevent the nation's youth from becoming completely ensnared in this addiction by slowing down the rapidly growing world of online betting and gaming.

Initial Concerns

Economic Implications
Since 2015, the online gaming industry in India had been on an upward trajectory, with a projected market value of USD 2.8 billion in 2023. Industry experts have argued that such a high tax rate may stifle innovation and deter new entrants, ultimately reducing the competitive edge of Indian gaming companies in the global market and significantly altering the growth trajectory.

Another concern was high taxation leading to increased costs for consumers, as gaming companies would likely pass on the tax burden to players. Which could've resulted in reduced player engagement and a potential decline in the user base, affecting overall revenue streams for the industry.

Consumer Behaviour
The imposition of a high GST rate would've very likely affected consumer behaviour. With increased costs, players would have had no choice but to shift to unregulated or offshore platforms that did not comply with Indian tax laws, ultimately leading to a rise in illegal gaming activities. The shift would've not only undermined the regulatory framework but also posed risks related to data security and fair play for consumers.

Legal and Regulatory Challenges
The new tax regime also raised several legal and regulatory challenges. One of the primary concerns was the differentiation between games of skill and games of chance. Historically, games of skill, which included most online gaming formats, had been taxed differently from games of chance, such as gambling. The blanket imposition, however, did not distinguish between these categories, which could have led to legal ambiguities and potential challenges in court.

Moreover, the enforcement of the tax rate would've quite likely posed regulatory challenges, especially in monitoring and ensuring compliance among a vast number of gaming platforms, both domestic and international.

Response Of The Public

Due to the current domestic implications, companies have resorted to exploring and understanding their options in the market, where their prospects are unclear, and the future is uncertain.

Certain companies have started to explore new countries with a much more relaxed tax regime. Brazil, with a 2-5% lower tax rate, has already had a major player in India enter its market. Opening new revenue streams internationally would help lower the domestic burden.

However, smaller companies that cannot afford to expand or diversify have either resorted to shutting down or being acquired. Industry experts foresee a reduction in India's gamer count and more mergers and acquisitions as companies seek to remain viable.

Many have also gone the legal route, by challenging the implementation in court. Multiple petitions have been filed in various High Courts challenging and pleading for the stay of the order. These petitions challenge the retrospective GST notifications that demand payment will ultimately amount to thousands of crores.

Authorities Taking Notice

GST Council's Role
The Government of India maintained that the tax liability existed even before the October 2023 amendments. However, it was argued by certain industry experts that the GST laws before October 2023 provided for only an 18% tax on gross gaming revenue or platform fees, not on the full-face value of bet.

Finance Minister Nirmala Sitharaman clarified that the 28% levy would only be applied prospectively after October 1, 2023. The government's consideration of exempting the online gaming industry from the retrospective levy for the period before October 1, 2023, can be considered as a ray of hope.

The GST Council's upcoming review of the levy, scheduled for July 2024, will be crucial in determining the future regulatory landscape for the industry.

Judicial Rulings
Legal decisions from the High Courts of Bombay, Karnataka, and Madras have established a separate line between online "skill gaming" and "betting or gambling," prohibiting the former from being classified as the latter for taxation purposes. Rummy is a "game of skill," according to the Karnataka High Court , which dismissed a GST show-cause notice that was issued in 2022 over an alleged evasion of Rs 21,000 crore in Gameskraft Technologies Private Limited v. Directorate General of Goods and Service Tax Intelligence & Others [WP 19570 of 2022]. However, the Supreme Court later stayed the order in 2023.

The Supreme Court has decided to hear several petitions contesting the order in the month of July 2024, once the summer vacation is over. By transferring 27 cases from various High Courts of India, the Hon'ble Court has requested the concerned parties to make the necessary arrangements.

This controversial online gambling tax strikes a compromise between controlling a quickly expanding industry and guaranteeing equitable income generation for the government. For a lot of struggling businesses, the government's idea of exempting the industry from the retrospective tax is encouraging. Differentiating between games of chance and skill and working with industry stakeholders to reevaluate the tax rate could promote a more competitive and long-lasting gaming sector in India.

This problem highlights the necessity for flexible regulatory frameworks in a changing digital economy by illuminating the dynamic interaction between law, economics, and technology. It will be critical to track the current effects of this tax policy on the online gaming industry as the discussion rages on and the Supreme Court's ruling approaches.

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