Taxing Times: How High Taxation Is Stifling India’s iGaming Sector

The landscape of iGaming in India has recently encountered turbulent waters, marked by regulatory shifts and taxation dilemmas that have left the industry in a state of confusion and uncertainty. 

A decision by the GST council to elevate the GST on iGaming of skill from 18% to 28% has sent ripples through the sector. Moreover, the imposition of the new tax slab compounded with retrospective GST notices and applicability to the money on the table – a transactional entity neither termed as a good or service – has brought forth profound ramifications for the entire industry.

Understanding The Implication Of GST On The Online Gaming Industry

Previously, the GST differentiation between games of skill and games of chance reflected a nuanced understanding. Games of skill, rooted in knowledge and experience rather than mere chance, were subject to a lower tax rate. 

This distinction, however, has been eroded, challenging the logic behind the differing tax slabs. Furthermore, the regulatory framework for iGaming, distinct from traditional gambling due to its virtual nature, remains nebulous.

An important point in this ongoing discussion is that games requiring skill do not transform into games of chance when played online. The added features found in online gaming, such as simulation exercises, enable players to define the distinctions between offline and online gameplay. 

Therefore, it is imperative to consider criteria for delineating between games of skill and chance sooner rather than later, as failing to distinguish between the two could give rise to hidden problems for both the industry and regulatory authorities.

The GST hike, retrospective charges, and taxation on non-tangible elements like the money on the table have plunged the iGaming industry into disarray. While the industry petitions and legal procedures have currently weathered the storm with legal stays on tax notice, new entrants into the iGaming industry find themselves navigating uncertain terrains. The unresolved issue of high GST percentage on games of skill, the effective date of the GST hike, and the scope of taxation further compound the sector’s woes.

Additionally, the repercussions of imposing a high tax rate on online gaming have been profound, particularly affecting smaller companies, gamers, and developers within the industry. Critics expressing concerns about this shift argue that such changes could severely hamper both small and large players, limiting their ability to contribute to the sector’s growth and innovation potential.

Furthermore, such a high tax rate combined with unpredictable changes in taxation policies indicates a red flag for various domestic and international investors willing to invest in the Indian skills, job market and overall iGaming industry, also recognised as the second largest gaming market in the world. 

Regulatory And Policy Implications For iGaming Companies 

The absence of clear guidelines and differentiating parameters from the Ministry of Electronics and Information Technology (MeitY), which is tasked with formulating regulations under the Information Technology Act 2000, exacerbates the industry’s plight. 

Although stakeholders (industry bodies, gaming SROs and government authorities) discussions have yielded parameters awaiting MeitY’s approval, the delay perpetuates confusion and renders many iGaming entities to venture into unregulated grey markets.

Amidst this turmoil, self-regulatory organisations (SROs) have emerged within the iGaming community, proactively addressing concerns of money laundering and player safety. 

By enforcing strict codes of conduct and leveraging technology for KYC procedures, monetary spends and time analytics, these initiatives by SROs aim to mitigate risks and foster trust within the industry.

Additionally, much clarity is required for regulating gambling as the Public Gambling Act of 1867, which currently serves as the only law in the country for tackling gambling, that too only by state authorities which leads to multiplicity of regulations around real-money gaming for online platforms to comply with. 

The 1867 Act instead serves as an antiquated legislation or new wine in an old bottle, that lacks the necessary provisions to adequately address the complexities posed by digital casinos, online gambling, and gaming. 

Moreover, non-uniform laws create further confusion for iGaming companies in terms of compliance and legal obligations.

Thus, addressing the following contentious issues on priority holds the potential for significant positive outcomes not only for the iGaming industry but also for individual firms within it:

• GST Council’s review of tax percentage: One crucial issue lies in the GST Council’s reassessment of the tax percentage to be applied to games of skill. Currently, such games are taxed at 18%, aimed at fostering digital inclusion and skill development. However, there is debate over whether this rate should be aligned with gambling, a game of chance, which is taxed at 28%.
• Effective date of enhanced GST: Another pressing matter concerns the effective date of the enhanced 28% GST rate. This rate must be applied from the decision date in 2023 rather than retrospectively. This retroactive implementation lacks provision for offsetting inputs and is thus deemed inequitable.
• Scope of GST application: The third vital issue pertains to the scope of GST application within the iGaming sector. It is crucial that GST be levied solely on the fees charged by gaming platforms and developers, rather than on non-tangible elements such as the money on the table. There is a proposal for iGaming platforms to segregate such funds into a separate escrow account, earmarked exclusively for winner payouts after TDS deductions.
• Expedited parameters for regulation: Lastly, there is a pressing need to expedite the formulation of parameters to differentiate games of skill from those of chance. Clarity in this regard is essential for effective regulation by the central authorities.

However, the ultimate resolution lies in the hands of the judiciary to clear the dark clouds on the horizon. The cases pending before the Supreme Court, a decisive ruling on critical issues – including GST taxation, retrospective implementation, and regulatory parameters – hold the key to unlocking the industry’s potential. 

Clarity from the apex court would not only alleviate immediate concerns but also pave the way for India to emerge as a leading hub for iGaming innovation.

In conclusion, the iGaming sector in India stands at a crossroads, grappling with regulatory ambiguity and taxation challenges. As stakeholders await clarity from both government bodies and the judiciary, the industry’s resilience and adaptability remain paramount. Only through concerted efforts to address these issues can India realise the full potential of its burgeoning iGaming market.

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