5 reasons why RMG companies failed to convince GST Council on tax rate and valuation

Published on:

On 11th July, 2023 the apex constitutional indirect tax body, the Goods and Services Tax (GST) Council in its 50th meeting decided to levy a 28% GST on full face value of bets or contest entry fees for online gaming for stakes (without making a distinction between games of skill and chance), casinos and horse racing, without making a distinction between games of skill and chance, must to the chagrin of the industry.

The Council came to this unanimous conclusion after hours of intense deliberation and over two years of consultation and meetings held by the Group of Ministers (GoM) constituted to study the issue. Reportedly, all state government representatives were on the same page after the issue was discussed threadbare and asked for the highest possible tax rate to be imposed on all three sectors.

While stakeholders have mostly reacted with shock and dismay claiming that the, a deeper analysis is required as to why the GST Council took the decision despite hectic efforts and lobbying by the real money gaming industry to have the taxation only Gross Gaming Revenue (GGR) or platform fees instead of full bet value, here are the five main reasons why the Real Money Gaming (RMG) industry failed in its efforts:

1) Negative Perception

Over the last few years, there have been various complaints raised from several quarters, including by state governments and NGOs that online real money gaming companies have been using various undesirable marketing strategies to lure gullible users and vulnerable sections of the society to keep spending their time and money on online games. Use of celebrity endorsers and bombarding users with advertisements on all forms of media are some of the complaints raised by civil society, state governments and political parties.

Online games being addictive and causing socio-economic problems such as financial losses, mental health issues besides compounding other crimes such as theft and fraud have also been some of the issues raised by political leaders both in the GST Council and outside.

2) Unreasonable and unrealistic demands on tax rate

Instead of accepting at the outset that a rate of 28% was reasonable and only limiting the ask to impose the tax on platform fee instead of full contest entry fees, many gaming companies and stakeholders argued for keeping the rate at 18% on GGR. In fact, the policy head of a prominent gaming company wrote an Op-Ed piece demanding that online gaming be given tax incentives and subsidies and be taxed at only 5% until 2027. Such demands made the industry look non-serious and insensitive to the prevailing fiscal realities and failed to take into account taxation rates on even essential products and services.

As Union Finance Minister Nirmala Sitharaman remarked in her press briefing post the GST Council meeting, taxation on online gaming, casinos and horse racing cannot be less than taxes imposed on essential commodities such as food items. Union Revenue Secretary Sanjay Malhotra in his recent interviews also reiterated and highlighted this fact, noting that even entry to IPL or sports events, entry to race courses and casinos as well as other entertainment activities are also taxed at 28%, and thus there is no reason for online gaming to be taxed at a lesser rate.

3) Misplaced priorities

The online gaming industry failed to take the pending issue of GST rate and valuation clarity that would be decided by the Council seriously but focused large part of its efforts on getting rules in place for the online gaming industry under the Information Technology Act and getting the Ministry of Electronics and Information Technology (Meity) appointed as the nodal ministry for the sector. Although rules have been notified in April 2023, the same have not been operationalised as Self-Regulatory Bodies (SRBs) under the said rules have not been designated.

Besides, the rules also do not seem to be the panacea that the sector was hoping for, and issues such as jurisdiction of states over online gaming and definitional issues of the kind of games that would be regulated under the new guidelines still remain unresolved.

4) Lack of unity

There were no cohesive and unified efforts amongst the online real money gaming, casino and horse racing industry to present a joint case and make common representations to the Ministry of Finance, GoM and GST Council. In fact, the three segments were actively working at cross purposes, with the online skill-gaming industry stating that it is completely different from casinos and horse racing, while the casino industry focusing on tourism and support to the Goa and Sikkim governments and the horse racing industry relying on a 1996 Supreme Court judgment in its favour besides arguing that it provides ancillary support to various industries.

In fact, even within the online RMG space, many companies and their founders were speaking in different voices, articulating for different tax rates and methodologies. The rummy, poker and fantasy sports companies within the space, on many occasions, made separate representations and did not speak in one voice on the issue.

5) Arrogance and hubris

Many founders, advisors and key advocates of the online gaming and casino industry lived in denial about the harm caused by the sector, negative perception and socio-economic impact. The tone and tenor of some of the stakeholders in not recognising the issues caused by the industry or being upfront about past mistakes, both in public and private interactions, were not taken kindly by policy makers.

It remains to be seen whether the gaming industry will introspect on these aspects and opt for a course correction or continue to remain disjointed in its efforts and detached from ground realities. While chance of an immediate roll back or change in the GST Council’s decision to impose 28% tax on face value of entry fees or bets appear bleak, one hopes that with unified efforts and course correction, the decision may be reviewed in the near future.