Powered by internet penetration and more recently the launch of 5G, the online gaming industry is expected to reach $5 billion by 2025 from about $2.8 billion in 2022
With rapid digitalization, India has established itself as a global leader in many areas and online gaming is one of them. This is still a nascent, but fast-growing sector. Powered by internet penetration and more recently the launch of 5G, the online gaming industry is expected to reach $5 billion by 2025 from about $2.8 billion in 2022. The number of gamers in the country is expected to expand from 420 million in 2022 to hit 500 million by 2025. Gaming is now being seen as a form of mainstream entertainment for millions of people. The convenience, portability, and affordability of smartphones have accelerated its growth.
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Taking notice of this, prime minister Narendra Modi has rightly pointed out that India can be a global hub for game developers and gaming services. There is a huge international market, and India can explore this. Linking gaming to other sectors like toys and audio-visual services is possible by developing games that are inspired by our rich culture, movies and folk tales. To further amplify this vision, the government announced the Animation, Visual Effects, Gaming and Comics (AVGC) task force in the Union Budget 2022. It is predicted that the AVGC sector will provide employment to over 20 lakh people in the coming 10 years. Under the AVCG task force, the government also formed sub-committees, one of which was online gaming. The government also provided a much-needed boost to the sector by naming the Ministry of Electronics and Information Technology (MeitY) as its nodal ministry. For years, the industry had struggled to convince state governments across India to regulate the sector. Now the amendments to the IT Rules have come as a sigh of relief for the sector. While the government acknowledges the potential of the sector, and many steps are taken in quick succession to support its growth, uncertainty related to taxation is a major issue for the industry.
Taxation is a Concern for the Industry
Designing a tax structure for digital services like online gaming, has been a concern for the industry and the GST Council. The GST Council in 2021 nominated a Group of Ministers (GoM) from different states of India to study and recommend an ideal GST for online gaming, casinos, and horse racing. Till now, the industry has been paying 18% GST on the Gross Gaming Revenue (GGR), i.e. the revenue earned by the platform. However, the GoM report mentions imposing 28% GST on the Contest Entry Amount (CEA), i.e. the pool of money the players add to play the games. Let us take an example. If the pool of money for players to play a game is Rs 200, the platform now charges 10% (i.e Rs 20) as the platform fee and pays GST of 18% on Rs 20 (i.e., Rs 3.6). The players play for the rest of the amount [Rs (200 – 20=180)]. The proposed taxation structure by the GoM aims to impose 28% GST on the pool. Then the platform will have to pay 28% GST on Rs 200, i.e. Rs 56 instead of Rs 3.6.
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online gaming industry has expressed three key concerns related to this tremendous hike in taxation rates. First, this is a nascent sector, which inspite of getting the attention of the policymakers, may not be able to grow due to high taxes. Second, if India wants to develop as a global hub for online gaming the taxation has to be aligned with global best practices. Third, any new taxation should ensure that it does not have any negative impacts on employment, business environment and investment.
Most countries seem to have imposed taxes on GGR. Some like the UK experimented with different models and realized that levying huge tax burden on the industry will push platforms and operators to tax havens, which will lead to a loss in revenue and employment. India’s current taxes is aligned with global best practices and, therefore, is there any need for change?
What Should be the Right Taxation Policy?
Audio-visual, recreational, cultural and sporting service is among the core export sectors for India. India is more cost-effective than countries like South Korea and has a strength in the English-speaking workforce, unlike China. The online gaming sector has significant forward and backward linkages with other sectors ranging from telecommunications, marketing, financial services, technology, audio-visual and culture, toys and events. India’s export potential in this sector can be used to showcase its culture and folk tales. While other competing countries are giving subsidies to the industry, the Indian industry is only asking for a transparent and predictable tax regime that allows them a stable business environment. In this regard, the GST council may study international best practices and weigh out the pros and cons of the proposed tax by the GoM and then take a decision. Conducive taxation policies will help the industry to grow and, hence, boost GST collection.
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Higher GST rates may not lead to higher revenue and the GST council has noticed this in other sectors including carbonated drinks where a tax of 40% has led to a fall in consumption and tax collections. The online gaming sector has the potential to yield economic benefits, which can be reaped with the right tax policy.
