Five years ago, not even the staunchest believers of India’s online gaming success story could have predicted that by 2022, this industry would be entertaining over 200 million people, generating over $2 billion in revenues and be worth over $20 billion. Similarly, it is hard to foresee today that by 2030, Indian online gaming companies could be generating over $25 billion in revenues and offering India’s most dominant form of entertainment after cricket. Achieving this dream, however, would require more than just entrepreneurial spirit, of which there is no dearth in the country. It would require the right policy framework that gives operators an opportunity to innovate, protects users from operator and self-abuse, and maximizes tax revenues without hurting the industry’s growth and innovation.
The online gaming industry currently pays 18% GST on its revenues or platform fee intake (known as ‘gross gaming revenue’ or GGR) for providing users a platform to play. This fee happens to be roughly 15% of the overall prize pool in any contest. This means that GST today is about 2.7% of the overall prize pool. Certain sections of policymakers expect to levy 28% GST on the overall prize pool, which would result in a 1,000% increase in the effective tax burden, and make the tax almost twice of operator revenues.
Such a tax policy would make it impossible for this sunrise sector to achieve Prime Minister Narendra Modi’s vision of India becoming a gaming superpower and the industry being a meaningful contributor to a trillion-dollar digital economy. It would also open the floodgates for (offshore) grey market operators that will be able to offer much bigger prize pools than tax-compliant domestic operators that will be forced to pass on higher taxes to users. This story has already played out in the case of horse racing, where the imposition of 28% GST on prize pools reduced industry revenues by over 60% and tax collections by over a third.
In the online world, where there are no domestic boundaries and anything is only a click away, the outcome could be the polar opposite of a $25 billion industry by 2030. As Tamil Nadu’s finance minister Palanivel Thiagarajan explained, “Servers could be anywhere, access could be anywhere, it could be through VPNs that mask your identity, it could be through payment of bitcoin or other cryptocurrency that is not registered anywhere in the system.” This could potentially wipe out our industry overnight, leaving tens of thousands of jobless, thousands of crore in tax revenue lost, and millions of gullible users falling prey to grey-market operators.
How did we get here? A large part of it has to do with confusion around the current tax law. Some in the government argue that under current law, games of skill are required to pay GST on the entire entry-fee pool instead of just their commission or GGR. This is a gross misreading of the law, which states that the total pool is taxable only if the underlying activity is deemed to be “betting and gambling”. Supreme Court and high court judgements have time and again established that games of skill do not constitute gambling. Recent high court judgements from Tamil Nadu and Karnataka have gone further and ruled that online games of skill are no different from games of skill played offline. They have further ruled that states do not have the right to regulate online games of skill under their powers to regulate “betting and gambling” under entry 34 of the Constitution, because such games enjoy constitutional protection.
The Union government has taken a very constructive approach to regulating games of skill by creating an inter-ministerial task force and holding exhaustive consultations with the industry. Recent advisories from the ministry of information and broadcasting on refraining betting and gambling sites from advertising on digital and broadcast mediums is a positive step towards distinguishing games of skill and chance. But somehow, this approach seems inconsistent with another arm of the government pushing for taxes that would crush the industry. One reason for this could be that some stakeholders in the government see real money gaming as a vice and want to shut it down. While consumer protection in real-money gaming is a must, there is enough evidence to prove that most stories around social ills related to online gaming are overblown or downright false. Independent entities like the Rotary Club and several prominent psychologists have questioned the premise that growth in online gaming is correlated with an increase in social problems.
In any case, shutting down the local industry is not going to protect consumers. It has been proven time and again in several other industries that penalizing taxes only end up shifting consumption in favour of non-compliant illicit operators instead of disincentivizing users, and therefore becomes a self-defeating exercise.
The challenges that concern online gaming might be new to India, but countries like the UK have been working on them for almost two decades now. India can skip all the pain that Western countries have faced on their path to regulating real-money games and leapfrog to the world’s best-in-class standards to protect consumers.
An industry-friendly, progressive policy with consumer protection at the forefront will accelerate healthy growth for the online gaming sector and bring in incremental tax revenues, which could make India a global online gaming powerhouse in return.
Trivikraman Thampy is co-founder and co-CEO of multi-game platform Games24x7
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