The 48th Goods and Services Tax (GST) Council meeting to be held by video-conferencing on 17th December may discuss changes in the valuation mechanism and rates for taxing online gaming, casinos and horse racing, although it is unlikely that a discussion may be reached in the upcoming meeting.

The decision taken by the GST Council based on the pending report of the Group of Ministers (GoM) tasked with preparing a report on the subject may seal the industry’s fate. Most major companies are said to be waiting for the outcoming of the GST Council on the manner and valuation of taxing the industry as well as relief from courts on the existing claim of 28% on full entry fees by the revenue department, which is said to be investigating various online poker, rummy, fantasy sports and casino companies and has even issued a show-cause notice of a whopping Rs. 21,000 crore to a leading online rummy company.

While taxing all three sectors, viz., online gaming, horse racing and casinos, at the highest possible tax slab of 28% is probably now fait accompli, the quagmire about valuation still persists. It has been reported that some states, such as Uttar Pradesh and West Bengal, have been pushing for a 28% tax on the full value of contest entry fees or face value of bets as opposed to the online platform fee, which has been elaborately discussed on several occasions; will only result in the debilitation of a sunrise sector, erosion of value for all stakeholders along with loss of jobs in the gaming as well as ancillary industries.

According to calculations based on industry reports such as EY-FICCI, Team Lease, Lumikai, ASSOCHAM and several others, the online gaming industry is expected to reach around Rs. 20,000 crore by next financial year, and if it continues to pay taxes as the current rate of 18% on platform fees (or gross gaming revenue) it will contribute Rs. 3,600 crore to the exchequer. Notably, the tax contribution will only grow by over 20% year-on-year as the industry sees a robust Compounded Annual Growth Rate (CAGR) of upwards of 20% (as illustrated in the table below).

Notably, if the tax is increased to 28% on the Gross Gaming Revenue (GGR), which most of the industry has quite fairly agreed to accept, the industry may still see a hit as it recovers from funding crunch and state bans; and the estimated GST receipts may go down by around 20% for the first year but see robust recovery and growth of 15-20% every year thereafter.

However, if the GST Council opts for the worst possible option for the industry and taxes the full value of each bet or entry fee at 28%, the consensus amongst experts and top executives of gaming companies is that the sector will immediately see a drastic decline of more than 90% and hardly Rs. 2,000 crore will be wagered annually. As studies globally have shown, heavy taxation or bans does not curb online gaming, but the activity merely shifts underground. Thus, tens of thousands of crores worth of online games will still be played in India, but the activity will be through illicit channels, black money and offshore operators, essentially garnering zero tax for the government.

As seen in the table above, the tax collections for FY 23-24 through online gaming may be a token amount of Rs.560 crore, and the amount is not likely to see any substantial increase thereafter. On the other hand, by FY 2025-26, online gaming is poised to see robust growth and reach Rs. 32,000 crores or more in size if allowed to be taxed at the current 18% on GGR levels and generate Rs. 5,760 crores in GST (not to mention additional income tax and other forms of revenue generation for the exchequer) for the Financial Year 2025-26. Thus, taxation at 28% of the entry fee could result in Rs. 5,200 crores or more of revenue loss for the government annually.

One hopes that the GST Council and mandarins in the finance ministry realize that illogical entry fees or face value taxation will only cripple the online gaming sector, push the sector underground and ultimately result in thousands of crores of revenue loss for the government. The GST Council would be best advised to avoid this taxation option which would result in all stakeholders, including the government losing out in the long run.