GST On Online Gaming — Government Should Look For A Win-Win Strategy For Users, Industry And The Exchequer

In the mid-19th century, chess enthusiasts came up with a new idea: the 'pawn sacrifice.'

The strategy involved deliberately sacrificing a pawn, a low-value piece, in the early game to gain a positional advantage or to lure the opponent into a trap.

This strategy gave players an edge, but only when they understood the broader context and ramifications of their decisions. Now, as we juxtapose the dynamics of chess with the current scenario of online gaming taxation, the parallels are striking.

The Group of Ministers' (GoM) decision-making process needs a strategy akin to the 'pawn sacrifice' — making decisions that may seem counterintuitive in the short term but can foster long-term benefits.

As we navigate this convoluted taxation proposal, we must also refer to the guiding principles, or the canons of taxation, established by Adam Smith in his seminal work, "The Wealth of Nations".

Smith outlined four primary canons: Equity, certainty, convenience, and economy. These principles continue to hold relevance and help us debunk prevailing myths and evaluate the proposed tax changes.

The myth versus fact analysis below highlights the need for such a nuanced strategy.

Equity: A Fair Share for All

The first principle, equity, argues for a fair tax system that distributes the burden in proportion to one's ability to pay.

The 47th GST Council Meeting (GSTCM) posits Goods and Services Tax (GST) as a pass-through tax, suggesting suppliers are unaffected, with the burden falling squarely on players.

However, a report by Indian law firm Lakshmikumaran & Sridharan disputes this claim, cautioning that an overtaxed system could push players towards illegal platforms, leading to revenue loss of over Rs 5,000 crore annually, and contributing to the proliferation of black money.

With the proposed 28 per cent GST rate effectively exceeding 100 per cent when calculated on the value of entry amount, the principle of equity is significantly violated.

Under the proposed GST amendments, it seems everybody loses — the industry, consumer and the government.

The central regulation and subsequent certification clearly will segregate what is permitted online games from what is not permitted online games, i.e gambling/betting.

The taxation framework cannot provide the same treatment to what is legal and legitimate with what is not permitted, there needs to be a clear distinction and differentiation.

Certainty: No Room For Doubt

The second canon, certainty, dictates that a taxpayer should know exactly how, when, and where their tax is due.

The GSTCM Agenda fears a ripple effect of taxing only the service providers' consideration, suggesting a similar mechanism could potentially influence sectors like manpower supply or e-commerce services. However, comparing these distinct sectors overlooks their inherent differences.

By taxing an online gaming platform's earnings through commissions like any other service, we uphold the principle of certainty.

Imagine you are going to your favorite store to buy a pair of jeans. You know the cost, and you are aware of the sales tax applied to your purchase. This transparency allows you to budget your purchase, and there's no unpleasant surprise when you get to the counter. This is certainty.

Translating this to our online gaming scenario, let's consider a user who enjoys a casual game of poker online. The platform provides the technology and environment for the game, charging a commission for its services — think of this as the price tag on the jeans.

Now, imagine if the user had to pay tax not just on this 'price tag' but on the total money he spent throughout the game. This is akin to the store charging tax on the jeans based on your total shopping budget for the month, not the actual price of the jeans.

This creates uncertainty and confusion, potentially deterring customers.

Economy: Efficiency Is Key

The canon of economy emphasises efficient tax collection that maximises revenue while minimising cost.

Think of the tax system as a pipeline. The government's revenue flows through this pipeline from the taxpayers to the state treasury. Now, imagine there are numerous leaks in the pipeline — these leaks represent inefficiencies in the tax collection system, such as unnecessarily high rates that encourage tax evasion or complex tax rules that increase the cost of compliance.

In the end, only a trickle of the original amount reaches the treasury. This is not economical or efficient.

To illustrate, consider a group of friends deciding where to have dinner. They have options ranging from a modestly priced restaurant to a high-end one. While the expensive restaurant might offer some extra frills, the group is likely to choose the affordable place because it offers value for money. The high-end restaurant, with its inflated prices, is likely to lose out on potential customers.

The same applies to a tax system: if rates are exorbitantly high, the activity might migrate to other jurisdictions, or worse, to illicit platforms.

Now, consider the global tax perspective on online gaming. Countries like the USA, UK, Australia, Singapore, and Italy have adopted a balanced approach by imposing tax rates varying from 3.5 per cent to 28 per cent on Gross Gaming Revenue (GGR).

These rates are set to ensure that the industry thrives while contributing a fair share to the national revenue.

In contrast, India, along with Sweden, has a GST of 18 per cent on GGR. The recent proposal to hike this to 28 per cent significantly deviates from the global norms. Such a move not only threatens the competitiveness of the Indian online gaming industry but also jeopardises the principle of economy in taxation.

High tax rates could compel users to migrate to platforms based in other countries with more favourable tax rates or even push them towards unregulated, illicit platforms.

This migration not only reduces the potential tax revenue but also increases the cost of regulation and law enforcement. Moreover, the heightened tax burden could cripple the burgeoning online gaming industry, leading to job losses and decreased economic activity.

Therefore, the proposed tax rate is counter-productive to the principle of economy, which stresses that a tax system should maximise net revenue while minimising the cost of collection and compliance.

Convenience: Easy Does It

Imagine living in a city where you rely on public transport for daily commute. You have two options: you can take a direct bus, Bus A, that's affordable, reliable, and gets you to your destination with minimal transfers. Alternatively, you could choose Bus B. However, Bus B is expensive, its route changes constantly, and it often arrives late or not at all.

Naturally, you would prefer to use Bus A for its convenience, predictability, and affordability.

The same principle applies to taxation. The process of tax payment should be as convenient as taking Bus A: predictable, straightforward, and affordable.

The GSTCM Agenda proposes a higher tax rate for online gaming, based on the premise that it has negative societal impacts. However, this broad brush approach doesn't differentiate between various forms of online gaming, some of which provide substantial societal benefits.

There is also a proposal for abatement methodology for computation based on the premise that platforms charge varying commissions for different games.

This is akin to saying that all bus routes irrespective of the distance travelled or type of bus should be charged the same amount for convenience of levy of tax.

Tax should be levied on the fee charged by the platforms and not fix the fee for the purpose of tax, especially when everything is digital.

An over-taxation approach, as suggested by the GSTCM Agenda, would be akin to forcing all commuters to take Bus B, regardless of its convenience or efficiency.

This could discourage participation in online gaming, driving users towards unregulated platforms that operate outside the taxation system, much like how inconvenienced commuters might resort to less reliable or legal means of transportation when the convenient option is priced out of their reach.

Therefore, while it is important to mitigate any potential negative impacts of online gaming, the design of the tax policy must take into account the diversity within the industry.

A one-size-fits-all approach to taxation might inadvertently infringe on the canon of convenience, making the tax system less effective and less efficient. This could lead to a lose-lose situation, with both the government and the players ending up worse off.

It is crucial that we make the tax bus ride as convenient and reliable as Bus A, or risk pushing taxpayers towards less desirable alternatives.

As the GoM prepares to meet on 11 July to decide the taxation regime, it needs to recognise the unique realities of the online gaming industry.

Any tax proposals that are not in line with the legal status of the industry, will not only lead to a multitude of litigations, but also lead to loss of investor confidence, employment and growth of an industry with high potential.

A taxation policy that considers the broader picture will not only generate revenue but also promote a thriving, responsible, and safe gaming ecosystem.

Just like a game of chess requires a balance of strategy, the world of online gaming in India needs a balanced taxation policy that adheres to the canons of taxation.

The proposed 28 per cent GST not only threatens to upset the growing online gaming industry, a significant contributor to India's digital economy, but it also defies the guiding principles of taxation.

It's time for policymakers to reconsider their moves, ensuring the game of online gaming remains fair, engaging, and rewarding for all. For, in the end, much like in chess, every piece, king or pawn, must be valued for a balanced game.