From Offshore Drifting To Lack Of Business Viability: Why Indian Gaming Industry Needs Governance & Sustainable Taxation

The Indian gaming population would now be exposed and marching towards unchartered territory not being governed by any laws, regulations, or guidelines.

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The Indian gaming industry is today at a crossroads. It is an industry valued at $2.5 billion and projected to reach $5 billion by 2025 (having already attracted $2.8 billion in Investments). The sector is understood to cater to 1 lakh direct jobs and is expected to see around 5 lakh direct and indirect jobs by 2025. The sector was already attracting Rs 2,000 crore in GST revenue, however, a 400 to 500 per cent increase of GST is now being contemplated, which would eliminate any chance of remaining profitable and which obviously will have a reduction in taxes as well.

So, while the popcorn-eating masses enjoy their tax breaks and the glitz of the silver screen, gamers will have to stay strong holding their joysticks, keep on gaming, and prove back to this tax adversity that it’s not just a passing fad but a force to be reckoned with.

It was only some time back when Prime Minister Narendra Modi spoke on the announcement of the AVGC-XR [Animation, Visual Effects, Gaming, Comic & Extended Reality] Task Force in the Union Budget 2022-23, highlighting that India is amongst the top five markets in the world for “mobile gaming,” the race seems to be getting over with the GST decision to tax the entire “face value” for games.

The gaming industry is at the core of AVGC sector and drives growth across its entire ecosystem. While the above draft AVGC policy and proposal remain which provided for benefits relating to power (admissibility of industrial power category tariff), setting up of AVGC-XR clusters across the State, allotment of industrial corporate land within the cluster, subsidy on lease rentals, promotion of global gaming events, and so on. 

It was like a buffet of opportunities but is hardly of much use now due to the GST decision of 28 per cent on full face value. It seems that all these proposals for the benefit of the sector have now lost their meaning. It appears that the Centre has forgotten that the online gaming industry was a flag bearer by supporting animation, AI, data science, and VR. Furthermore, the negative impact is not just a matter of job losses. It is actually closing the door to potential job creation. 

The various judicial precedents granting protection to skill-based games wherein there is the use of memory, knowledge, and judgement, to make an informed decision before putting money on stake, have been completely unsettled, overturned, and thrown into disarray by holding that the differentiation between skill and chance is irrelevant to the application of GST. 

The Centre’s decision to tax the price pool surely is going to backfire. It truly would be remarkable if myths have powered the shaping of this decision and policy. 

Firstly, the decision seems to be founded on a myth that the gaming industry pays only 2 to 3 per cent towards GST contribution (less than even food items). The truth is, the the industry was actually contributing 18 per cent to the platform fee. 

Skill and merit-based gaming could never have been equated to casinos, which have a totally different business model. Unlike casinos, online gaming companies have no source of making profits except for the platform fee, whereas in the case of casinos, there is an instance of direct profit being made.  

Similarly in the case of lottery, which is a “game of chance,” the price is predetermined, and it constitutes only a portion of the value of total lottery ticket sales. A significant amount is pocketed by the lottery seller, whereas the online gaming platforms have no interest in the outcome of the game and only have a very small portion of the deposits being collected as a “platform fee”. 

It is also misconceived that there are any windfall gains which happen like in a casino or a lottery to an online gamer, who is usually engaged in the said activity to get winnings of a very small amount. These miniscule winnings would now also lose relevance because of heavy taxation and the entire gaming population would surely find more lucrative and engaging alternatives. Most of the online gaming companies which are MSMEs would now be headed towards closures or job losses — or perhaps, extinction.

The IT Amendment Rules, 2023 (gaming amendment rules) and the SRBs created thereunder, would be defunct. While it appeared from the said amendment that it was expecting to support a healthy and safe online gaming industry, however, the GST announcement (i.e., 28 per cent GST on full face value/deposits) will have all counter-productive results and would act as a big blow to the vital sunrise sector of gaming which could have been the driving factor for “Digital India”. 

The industry which was growing at a CAGR of 30 per cent would now be encountered to witness the domino effect by seeing mass layoffs, loss of investor confidence, the proliferation of offshore gaming sites and a walkover to China, to take a lead in the gaming sector. 

Significantly, it will impact the bright young engineers whose innovation would now come to a grinding halt and would lead to brain drain. The contribution of this sector which was expected in the one-trillion digital economies has been contradicted by the GST decision, and would severely impact all the Centre’s vision programmes of Digital India, Startup India, Make in India, and Atmanirbhar Bharat.

Gaming, which apart from being a means to get entertained and a recreational activity, was also a big source addressing the global problem of loneliness. However, developers’ creativity and innovation would now be drifted towards offshore gambling and betting sites having no business presence in India. 

This would also be a big blow to the concept of a trusted and open Internet, contemplated under the Digital India Act. The drive towards offshore gambling and betting sites would obviously have counter-productive results to the revenue collection ambitions of the Centre.

It will not only pose a threat to the national security, integrity, and sovereignty of the country but would also help benefit the parallel economy which is able to attract the gaming population with its dynamic, creative, and lucrative advances. All of this would be happening at the cost of a legitimate Indian gaming business. 

In other words, the Indian gaming population would now be exposed and marching towards unchartered territory not being governed by any laws, regulations, or guidelines, with gaming platforms having no requirement of certification and having no transparency, traceability, or accountability. Further, the end user will be left with no access to any grievance redressal mechanism. 

The Centre must understand and appreciate that the best course to have certainty is by at least announcing the reversal of the decision to tax the entire deposit/full face value, which has a consequence of an increase in the GST by 500 to 1,400 per cent, making online gaming business unviable. 

They may, however, continue with 28 per cent taxation on the GGR, which itself will have an increase of 55 per cent in the GST quantum and can qualify as a sustainable taxation regime and can bring certainty and predictability.

(The author is an independent counsel and columnist)

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