Unpacking the online gaming and gambling GST saga

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Yesterday, the International Cricket Council released the promo for the 2023 Men’s Cricket World Cup, which India is hosting. The promo, featuring Bollywood superstar Shah Rukh Khan, was super cool. But it also served as a reminder that we’re just over two months away from the showpiece event and there’s still no news of when ticket sales begin.

Come to think of it: how does it matter, right? Even if ticket sales begin a week before the tournament, we’ll all queue up for hours in blistering heat or heavy rain to buy them. International fans be damned, amirite?

Thanks to all of you who voted in our poll last week about cricket Twitter influencers. Rather ironically, “I’m not on Twitter” got the most number of votes, which again reminded me of how much of an echo chamber and a microcosm of the real world that platform is.

Reminder that The Playbook’s FPL mini league is up and running. We’ve already got 12 members and my favourite team name so far is Oxymourinho. Nice one, Rahul Venkat! In case you’re interested in joining, our league code is d5dh3d.

A bit of housekeeping: There won’t be an edition next Friday, July 28, as we have the day off for Muharram. So I’ll see you in August after this one.

Right, let’s go.

The GST game is afoot

Photo credit: Aidan Howe/Unsplash

If you work in India’s online gaming industry, I feel for you. The last 10 days must have been a real whirlwind. For those of you who aren’t aware (and/or haven’t been reading this newsletter 🤨), India’s Goods and Services Tax (GST) Council has recommended that online gaming, casinos, and horse racing should be taxed at 28% on the full face value of the bets.

This means that if you bet ₹100, you’ll have to pay ₹28 as tax. If it’s an online gaming operator, there’s also a platform fee of 8-15%, apart from a 30% tax deducted at source (TDS) if you win anything.

So, for instance, if you enter a two-player contest on a fantasy sports platform with an entry fee of ₹100, assuming the platform fee is 10% (₹10) per player, the prize pool is ₹180. Now, with a 28% GST, that comes down to ₹129.6. And if you win, you’ll have to pay 30% TDS, which means you’re left with ₹90.72. You’re basically losing ~₹9 despite winning. Of course, the chances of taking home a higher amount increase if you enter a contest with a bigger prize pool, but that also usually involves more players, which reduces your probability of winning.

So far, firms that offer skill-based games have been paying an 18% GST on the platform fee, otherwise known as gross gaming revenue (GGR). The GST Council recommended that online gaming, whether skill-based or chance-based, should be treated at par with gambling at casinos and race courses. And all three will be taxed at a uniform rate of 28%.

Unsurprisingly, the online gaming industry has been up in arms over the council’s recommendation. In an open letter signed by 127 companies, the industry said that taxing the full deposit value would lead to “an unprecedented 400-500% increase in GST burden, which the industry will have no choice but to pass on to 400 million Indians”. Instead, if the tax is kept to the platform fee and increased from 18% to 28%, it would lead to a 55% rise in GST quantum, which would still be “challenging but the industry supports this to be a contributor to nation-building”.

They further made their case by saying that the industry employs 100,000 people and is projected to add 500,000 jobs over the next five years. “Any negative impact on the industry will lead to companies making cuts in their spending, a majority of which goes towards employing the Indian youth, thereby resulting in significant job losses.” They also warned that users would shift to black market operators, including illegal offshore gambling platforms.

It’s not just the companies. Around 30 Indian and foreign investors in the online gaming sector, including Tiger Global, Peak XV, and Steadview Capital have also written to the government. They said the industry has attracted $2.5 billion in global funding across ~400 startups. If the GST Council’s recommendations are implemented, it would “adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years.”

On its part, India’s finance ministry said during a press conference after the GST Council’s meeting that the intent was not to shut down the industry, but rather simplify the tax collection system. Finance minister Nirmala Sitharaman said there was a lot of discussion about the impact and revenue generation potential of the online gaming industry. Ultimately, the GST Council decided that gaming and gambling could not be taxed lower than essential items such as food products.

It should be noted that the GST Council’s recommendation was made after a process that began in May 2021, when it formed a Group of Ministers (GoM) to examine the valuation of services provided by casinos, race courses, and online gaming portals. The GoM comprised ministers from eight states. It submitted its first report to the GST Council in June 2022, where the uniform tax of 28% was proposed. However, the council asked the GoM to re-examine certain issues regarding casino taxation after a request from the Goa government.

The GoM submitted its second report at the 50th GST Council meeting earlier this month, where it said that there was no consensus among members regarding whether online gaming, horse racing, and casinos should be taxed at 28% on the full-face value of bets placed or on the platform fee. The GoM asked the GST Council, which comprises the finance minister and ministers from all 28 state governments, to take a call.

In a press release following the meeting, the GST Council said it had deliberated on the issues and recommended the following:

• Suitable amendments to be made to the law to include online gaming and horse racing…as taxable actionable claims.

• All three—casinos, horse racing, and online gaming—to be taxed at a uniform rate of 28%.

• Tax will be applicable on the face value of the chips purchased in casinos, the full value of the bets placed with the bookmaker at race courses, and the full value of the bets placed in online gaming.

These three points, which I have quoted near verbatim apart from minor tweaks for brevity and punctuation, are the root cause of the whole saga.

Let’s start with the first point. An actionable claim refers to the legal right to receive payment for goods or services provided. Examples include unpaid invoices and rent. Generally, transactions that are actionable claims are not taxable except for lottery, betting, and gambling. The GST Council now wants to add horse racing and online gaming as taxable actionable claims.

In the case of online gaming, that becomes an issue if the tax is levied on the entry amount rather than the platform fee. As an indirect tax, GST is meant to tax the actual service fee received by the platform. That’s not happening in this case. The actionable claim, which is the entry fee, is returned to the user if they win. Does that mean the GST will be credited back to the user as well?

Point two: a uniform tax rate for online gaming, casinos, and horse racing. This is an issue for firms that offer skill-based games because they believe their services shouldn’t be treated on par with the other two sectors, which fall under gambling. Indian courts have ruled that games of skill are legitimate and shouldn’t be considered gambling.

“In horse racing and casinos, you’re betting against the house. In online gaming, it’s user versus user. That’s a key differentiator, and that’s where the conflict arises,” says Abhinav Shrivastava, partner at LawNK, a Bengaluru-based law firm that deals with sports, media, technology, and intellectual property laws.

As for point three, there is ambiguity regarding where the tax will be levied in the case of online gaming. The press release says the tax will be applicable on the “full value of the bets placed”. Does that refer to the amount users add to their wallets on online gaming platforms or is it the amount entered in each individual contest?

“In a casino, you’re only taxed at the entry point and not during every transaction,” says Shrivastava. Whether you play blackjack, roulette or slots with that money, it won’t be taxed separately. You’re taxed at entry and then there’s a TDS if you withdraw your winnings.”

Photo credit: Chris Liverani/Unsplash

If online gaming users are taxed each time they enter a contest, it’ll be a death knell for the industry, adds Shrivastava. “The unit economics won't work. The smaller players won’t be able to manage it. For the bigger players too, it’ll be a significant hit.”

The larger players such as Dream11, Games24x7, and Mobile Premier League (MPL) might be able to chug along by offering so-called mega contests, with prize pools of ₹1 crore ($122,000) and above. The returns for such contests would be large enough to justify the tax. But there aren’t too many platforms that can offer such mega contests.

“The number of users who participate in such mega contests doesn’t even compare with those who participate in one-to-one or one-to-four contests,” says Shrivastava. “The transaction volume that sustains platforms lies with one-to-one and similar small contests. That’s where the platforms get their critical mass.”

Interestingly, a different arm of the Indian government has acknowledged the ambiguity in the GST Council’s recommendations. “One of the problems is that there are many interpretations of this, and it’s not fully clear even to me,” admitted Rajeev Chandrasekhar, minister of state for electronics and information technology, at The Indian Express Adda, an event organised by the English daily, on Wednesday.

❝  

Are you paying 28% [GST] on every wager out of the wallet into the game? Are you paying it one time [while putting money] into the wallet? If it’s going to be every time [you make a wager], it’s certainly going to be very complex… the small startups will quickly die. And that is certainly not what any policy objective is.

  Rajeev Chandrasekhar at The Indian Express Adda

Ever since the recommendations were released, Chandrasekhar has made it a point to stress that the GST Council is not equal to the government of India, since it comprises representatives from all 28 Indian states. During the Adda event, he further explained that state governments tend to look at gambling as a social evil, and they extrapolate online gaming as a surrogate of gambling. Why? Because of the “bad actors” in the industry.

“There have been people who gamed the system as gaming companies. A lot of that is determining the response of state governments,” he said. Without taking any names, he gave an example of one such bad actor based in Karnataka who “gamed the system, made lots of money, and didn’t pay any GST.” Some of these platforms have masqueraded as gaming and offered gambling, he added.

The Directorate General of GST Intelligence (DGGI), a law enforcement agency under the finance ministry, is investigating at least a dozen online gaming companies for tax evasion. In September 2022, the agency issued a notice to Bengaluru-based Gameskraft, which operates games such as Rummyculture and Gamezy, alleging that it had failed to pay ₹21,000 crore ($2.5 billion) in GST since 2017. The company was also accused of promoting online betting through its card-based and fantasy games. However, the Karnataka High Court quashed the GST notice in May, saying it was “illegal, arbitrary, and without jurisdiction”.

On a parallel track, Chandrasekhar’s ministry of electronics and information technology (MeitY) has been given a mandate to create a regulatory framework for online gaming. In April, MeitY formally notified The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021. The notification said the ministry “may designate as many online gaming self-regulatory bodies as it may consider necessary for the purposes of verifying an online real money game as a permissible online real money game under these rules.” It also specified that the self-regulatory bodies would have to ensure that online real-money games don’t involve “wagering on any outcome”.

According to The Economic Times, MeitY has received three applications for forming these self-regulatory bodies. Even as it considers these applications, Chandrasekhar has come out and said in multiple media interviews that once the regulatory framework allowing permissible online gaming is set, MeitY will request the GST Council to reconsider its recommendation. “On the non-permissible side, you can do whatever punitive taxation that you want. But on the permissible side, we hope [the GST Council] will consider a tax regime that encourages the growth of the industry,” he said at The Indian Express Adda.

Does this mean there’s still hope for India’s skill-based gaming industry? Jay Sayta, a technology and gaming lawyer, says that the GST Council can consider MeitY’s request, but it doesn’t have to. “Taxation is different from regulation. And the GST Council is a separate body comprising members from all the states. So, it doesn’t matter what MeitY says. They can totally disregard whatever request comes in, and they may probably do so.”

At the press conference following the GST Council meeting, the finance ministry was also asked whether it would synchronise with MeitY. Sitharaman replied that the ministries and GST Council will “make sure we’re in constant touch with each other.” But she also clarified that MeitY’s job is to look at regulation, while her ministry will look at it purely from the taxation standpoint. “Even as I say that, we will still align with whatever MeitY wants to bring in as the regulation.”

Sayta also pointed out that the GST Council’s recommendation has to be passed by the Parliament and all 28 states. Only then will it come into force. “Few states have also written to the council requesting a reconsideration, so we’ll have to wait and see how that plays out in the next few weeks and months.”

So, the status quo remains for now. If you’re a user of any of the skill-gaming operators, you’ll still only have to pay an 18% GST on the platform fee for the time being. But what’s clear is that the government wants to rein in the proliferation of platforms that push the boundaries of skill-based gaming. There are over 1,000 gaming startups in India, per market research firm Tracxn. Revenue from transaction-based games in the country touched ₹10,400 crore ($1.2 billion) in 2022, up from ₹7,500 crore ($914 million) the previous year, according to a report by the Federation of Indian Chambers of Commerce & Industry and consultancy firm EY.

It’ll be interesting to revisit these figures a year from now.

Do you think real-money online gaming should be taxed at the same rate as gambling at casinos?

⚡️Quick Singles

🇮🇳💉 A four-year investigation by the World Anti-Doping Agency (WADA) into India’s anti-doping programme exposed a slew of missed dope tests, a faulty result management system, and whereabouts failures, reported The Indian Express. WADA, in its report, said it monitored 13 “high-level” Indian athletes ahead of the 2022 Commonwealth Games and found that one of them tested positive for performance-enhancing drugs. Meanwhile, many star Indian male cricketers were not even tested in 2021 and 2022.

📺🏈🚴 Buoyed by the success of its latest sports docuseries Quarterback and Tour de France: Unchained, Netflix has reiterated that it’s sticking to “sports-adjacent programming” rather than getting into live sports streaming. For now. “We really think that we can have a really strong offering for sports fans on Netflix without having to be part of the difficulty of the economic model of live sports licensing,” Netflix co-CEO Ted Sarandos said during the company’s second-quarter earnings call on Wednesday.

⚽️🇺🇸💰 Major League Soccer (MLS) could join the National Hockey League, or NHL, and National Basketball Association, or NBA, in allowing sovereign wealth funds to invest in its teams. MLS board members will discuss the matter at a meeting next week. It’ll be interesting to see if Saudi Arabia’s Public Investment Fund takes up the offer after the country’s football league failed to convince Lionel Messi to join it. Messi chose the MLS instead, where he will play for David Beckham’s Inter Miami.

⚽️🌏🏆 FIFA fell short of its target to earn $300 million through selling broadcast rights for the 2023 Women’s World Cup, which began on Thursday, by about $100 million, reported The Wall Street Journal. This is the first time FIFA sold the Women’s World Cup broadcast rights separately. Earlier, it gave away the rights for free to broadcasters who purchased the rights for the men’s World Cup.

🎮🇺🇸🇯🇵 Microsoft and Sony patched up and agreed to a 10-year deal to keep Call of Duty on PlayStation, should the American tech behemoth’s $75 billion purchase of publisher Activision Blizzard go through. Sony had earlier declined to enter deals with Microsoft and publicly opposed the Activision acquisition. The Japanese company was worried that Microsoft would make the hugely popular Call of Duty game exclusive to its Xbox console. Microsoft has also signed 10-year licensing deals for Activision games with other companies, such as Nintendo.

🏋️🇦🇺 The Australian state of Victoria has pulled out of hosting the 2026 Commonwealth Games because of a burgeoning budget. The state government said the cost of hosting the 12-day event had shot up from an earlier estimate of A$2.6 billion ($1.75 billion) to A$7 billion ($4.72 billion). This leaves the Commonwealth Games Federation less than three years to find a new host. Meanwhile, the Gujarat government denied media reports that it was interested in hosting the Games in Ahmedabad. It said that it’s focused on bidding for the 2036 Olympics.

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