The online gaming industry in India is facing an uncertain future due to the recent decision of the Goods and Services Tax (GST) Council to increase the tax rate on gaming companies to a uniform rate of 28%. This move could have devastating consequences on the industry's growth, technological capabilities, user experience, consumer welfare, employment opportunities, and incoming investments.
The Sin Tax
The GST Council's decision to impose a uniform tax rate on casinos, racecourses and online gaming is being dubbed as the "sin tax" as it is mainly levied for public health purposes to discourage the consumption of harmful products such as gambling, alcohol products, cigarettes, or horse racing. This new tax will be levied upon the total money put in by users during gameplay, as opposed to the current practice of levying tax on the winnings collected by the users.
Erroneous Interpretation of the Law
The GST Council's stance towards the online gaming industry is based on an erroneous interpretation of the law, which is wholly inconsistent with previous judicial pronouncements and state policy. The equitable treatment of online skill gaming, horse racing, and gambling activities by the GST Council's stance is not in line with the government's steps towards creating an equal opportunity and conducive environment for the growth of the digital gaming ecosystem.
The Constitution of India lists "betting" and "gambling" as state subjects, providing powers to the states to regulate the areas of gambling and betting. With the introduction of GST, taxes on entertainment and amusement were subsumed into the GST. However, the terms "betting" or "gambling" have not been defined under the GST laws.
The Karnataka High Court in the case of All India Gaming Federation vs. The State of Karnataka & Ors has defined the terms "betting" and "gambling" as confined to games of chance. The definition of betting and gambling and the judicial interpretation given to these terms seems to restrict its applicability to cases where the winnings are merely on the occurrence of a chance or accident (i.e., a game of chance). Therefore, Rule 31A of the CGST Rules, which applies to lottery, betting, gambling, and horse racing, cannot apply to online skill-based gaming platforms.
Impact on the Industry
The online gaming industry in India has been growing rapidly in recent years, and this new tax could significantly impact the industry's growth and lead to job losses. It could also discourage incoming investments and hinder the industry's technological advancements and user experience.
In conclusion, the GST Council's decision to impose a uniform tax rate on online gaming companies could have far-reaching and negative consequences for the industry, which is still in its nascent stage. The industry needs a conducive environment for growth, and the imposition of a "sin tax" is not the solution. The government must take steps to understand the nuances of the industry and provide a framework that encourages growth while also ensuring consumer welfare.