India’s online gaming industry in search of clarity on taxation

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India’s online gaming industry is expected to grow by 22% by 2023 taking its valuation from $906 million to $2 billion by 2023, says a new All India Gaming Federation (AIGF) and EY India report

This stupendous growth will result from India’s tech-savvy population, broad internet coverage, and affordable smartphones that have been driving the Indian online gaming industry to the forefront.

Currently, India is the fifth most prominent online gaming market globally. Apparently, online gaming is also the fourth largest sub-sector in the Indian media and entertainment sector.

The huge revelations

Continuing further, the report stresses the fact that Indian gamers will increase from 360 million in 2020 to 510 million in 2022. Whereas, the real money players of online games will increase from 80 million in 2020 to 150 million in 2023. The Industry will generate more than 11,000 jobs between 2021 and 2025, contributing to the growth of the economic value by INR 100 billion.

Debate on tax imposition

Looking at the growth prospects surrounding the online gaming industry, the report notes that GST implications and impediments impact the industry. Should the tax rate exceeds 20%, gaming operators and consumers might step back from joining the licensing system, thereby not entering the grey market, the report observes.

Furthermore, the report states that GST imposition is an important step forward to sustain the industry’s competitive milieu. Currently, the games operate either on ‘rake fee’ or ‘freemium models.’ The former prohibits the gameplay without a rake fee whereas the latter requires the user to purchase certain items while facilitating free gameplay.

A majority of countries tax the online gaming industry at or below the GST/VAT rates and the most common way for taxing is on the rake fee that the industry stakeholders earn in countries such as the US, UK, and EU (except France.)

Other countries follow the deemed credit model wherein the government charges tax based on the entire stack value while enabling deemed deductions on payouts.

AIGF CEO Roland Landers says “The valuation disputes under GST law have been a dampener to the Industry. It is important to highlight that regressive taxation of these emerging sectors may only make the business unsustainable in India. Our recommendation is that the tax authorities should align their policies with internationally accepted principles of taxing the online gaming sector and provide certainty to the industry.”

Current situation

Bipin Sapra, partner, EY said, “The government needs to unambiguously state and clarify that games of skills such as rummy, fantasy sports, poker, etc., which are different from games of chance such as lottery, betting, and gambling, will be taxed at the normal GST rate of 18% and the taxable value will be the platform fee or rake fee. A clarification to this effect will give certainty to this Industry and foster more investment in this sector.”

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