Amidst Consternation In Indian Gaming Ecosystem, Is Government Turning Into A Nanny State And Simultaneously Killing A Golden Goose?

A day before the 50^th GST Council met on 10 July, Swarajya carried a well argued article by Ashutosh Muglikar, which suggested that government should look for win-win situation when it came to the  finalising the GST on online gaming — something that would be fair to users as well as industry.

Sadly, it was not to be.

As the minutes of the council’s meeting reported, the Group of Ministers (GoM) which was constituted to look into the issues related to taxation on casinos, horse racing and online gaming and whose first report on June 2022 was deemed unsatisfactory — again submitted a report.

This time stating “no consensus could be reached on whether the activities of online gaming, horse racing and casinos should be taxed at 28% on the full-face value of bets placed or on the GGR “ (the  Gross Gaming Value,  the platform fee charged  on players).

In view of the failure, the GST Council took it upon itself to close the issue and decided: “Casino, Horse Racing and Online gaming to be taxed at the uniform rate of 28%. Tax will be applicable on the face value of the chips purchased in the case of casinos, on the full value of the bets placed with bookmakers in the case of Horse Racing and on the full value of the bets placed in the case of Online Gaming”.

Swarajya’s report on the proceedings, quoted Finance Minister Nirmala Sitharaman saying, the tax on online gaming companies would be imposed without making any differentiation based on whether the games required skill or were based on chance — adding that the intention behind these decisions was not to put an end to any industry related to online gaming, casinos, and horse-racing.

But in the case of online gaming at least, throttling the industry might just be the end effect, fear many industry watchers.

This has also  emerged as the near-unanimous view of almost all stakeholders: investors in the gaming business,   industry bodies, the players and  the gaming service providers.

 Consider:

• Top investors including Chrys Capital, Kalaari Capital, Peak XV Partners and Tiger Global Management were quoted by a report in the Times of India  writing to the Prime Minister’s office: “The decision, which has caused shock and dismay, will substantially and meaningfully erode investor confidence in the backing of this or any other sunrise sector in the Indian tech ecosystem,” adding that the $2.5 billion capital already invested in the sector would need to be written off.

Elsewhere he is quoted calling the decision “unconstitutional, irrational, and egregious.”

Skill or chance

The legally shaky ground of the proposed bundling of all types of games — both games of skill and games of chance — under the highest GST bracket should have been apparent to the states in the GST Council who voted by a majority to embrace the vastly increased GST  pot at the end of the online gaming rainbow.

Even two years ago,  High Courts in Kerala , and Karnataka overturned  partial or complete bans on online gaming and upheld  the distinction between games demanding skill and those based purely on chance – something the GST Council has ignored. 

Abhishek Malhotra, Managing Partner TMT Law Practice), writes: “While this has come as quite a shock for the industry, it remains to be seen as to how and on what basis, this policy shift is to be incorporated in the law. This will require an amendment to the GST Act… It’s to be seen whether it would survive a constitutional challenge, especially since the Supreme Court and at least two High Courts have provided a distinct classification between games of skill and chance. To bundle everything under one head, is harsh and unsustainable”.

The millions who indulge in the top rated fantasy sports games like Dream 11 and MPL and spend hundreds of hours sizing up the form of IPL players would be outraged if told the result of their efforts was all chance.

Another legal expert Sudipta Battacharjee of Khaitan and Co, quoted by BBC felt  the proposed GST regime would "disincentivise players and is totally inconsistent with global standards" where VAT or GST is levied at a median rate, and that too only on platform fees or commissions.

Different view of IT Ministry

Ironically, not every entity in government is  on board with the Finance Ministry and the GST Council. IT Minister Rajeev Chandrasekhar, while speaking at a recent Express Adda event said “We are upset (with the GST Council decision)”, reported  PTI while Financial Express headlined that  he  would ask the GST Council to reconsider the decision of imposing 28 per cent GST on online gaming.

We may be excused for feeling this is looking like a rare Good Cop-Bad Cop routine, in an environment where the government very rarely encourages ministries to express differing viewpoints on the same issue.

Rajeev Chandrasekhar suggests that states tend to extrapolate online gaming  as a surrogate of gambling and consider it a social evil. 

The boilerplate response   of those advocating the banning or severe control of all times of gaming and gambling  speaks of the potential harm to youngsters and the state’s duty to protect such vulnerable sectors from temptation.

This is beginning to look very much like the argument in favour of a Nanny State. In fact an interesting  facet of mobile gaming in India was brought out by InMobi’s Mobile Marketing Handbook 2022: Some 43 percent of all  mobile gamers in India are women — and 49 percent of them are 34 years  or older — not exactly vulnerable youth.

Also overlooked in  treating this purely as a taxation mobilization matter without consideration of wider ramifications, is the huge opportunity presented by India’s dominant position in global gaming. Analysts Sequoia and Boston Consulting Group (BCG), called Mobile Gaming a ”$5 billion+ opportunity” for India, by 2025, as we reported in Swarajya, even a year ago.

A report (registration needed to download)  by technology staffing firm TeamLease Digital highlights the wide spectrum of skills and qualifications that are needed to fuel India’s pole position in gaming. The accompanying graphic highlights some of them.

Any imposition of a level of taxation, perceived by India’s  over 400 million active online gamers as unreasonable will  likely drive  a significant number to foreign options which are deemed to be more paisa vasool.

In the long term this would be akin to killing the golden goose of gaming-related tax revenues.

A pragmatic policy calls for more reasonable tax levels matched by a readiness to get off that moral pedestal from which all gaming looks like evil incarnate.