Abhishek Malhotra, who is a managing partner at law firm TMT Law Practice and represents multi-gaming platform WinZo, recently wrote to the Prime Minister’s Office (PMO) regarding the rumours about raising the Goods and Services Tax (GST) rate on online gaming, calling it “an Immediate And Existential Threat To The Entire Gaming Ecosystem”, according to a report in Medianama.
In his letter, a copy of which was accessed by Medianama, Malhotra raised concerns over the government’s reported plan to implement GST on Gross Gaming Value (GGV) or the entry amount. The lawyer warns that moving forward with a 28% GST rate on GGV may prove to be a potential threat to the Indian gaming industry, and advises the government to continue with an 18% tax rate on the Gross Gaming Revenue (GGR), i.e. the margin or commission retained by online gaming platforms.
Malhotra emphasized on different reasons due to which, he believes, the new tax rate on online gaming will account to lower player count, reduce foreign investments, and also hurt the competitive nature of the Indian gaming sector.
According to Malhotra, online games are being compared to luxury goods like casinos and horse racing. Malhotra asserts that while luxury goods are sought after by the “elites,” online gaming has become more popular among India’s Tier-2 and Tier-3 cities.
With the increase in the GST rate, the currently affordable form of entertainment for these players becomes non-viable. This will create problems for online gaming companies in retaining the player base, as opined by him.
Further, many online gaming companies which are barely making any profits will have to face increased taxation. Players in these online games will also have to pay an increase in tax on winnings, which might prove more expensive and hurt user retention for these online gaming companies.
With companies potentially failing to retain gamers, the revenue will go down, which will automatically reduce the tax potential of the Indian gaming sector. This, in turn, will reduce the tax revenue for the government. According to Malhotra, a similar situation occurred in FY 2017-18 with an increase in GST rate imposed on horse-racing which lowered the revenue by 50% and tax revenue by 65.5%.
Malhotra also spoke on the lower tax rates on GGR levied in different countries with Germany at 16%, Singapore at 5%, Nevada in the United States at 6.75%, Belgium at 11%, and Denmark with 20% tax rate. With the Indian government taxing online gaming at 28% on the entire sum, several foreign investors might think twice before allocating funds.
The 28% tax rate will also push the players to illegal offshore betting and gambling platforms. These operators are labeled illegal for a reason, as they do not pay taxes to the government. Furthermore, the users on these sites are prone to fraud and financial risks. It remains to be seen whether the Prime Minister’s Office or the GST Council responds to Malhotra’s concerns.