1000% Tax in Online Gaming: Game of Skill Vs Chance

The gaming industry has been flourishing, and how! The revenue of this industry was Rs 1,700 crores in 2022-23. As quoted to the Economic Times by Revenue Secretary Sanjay Malhotra – “If the volumes remain the same, our estimate is that it would be 10 times the volume we got last year, which should be about Rs.15,000-20,000 crores.”

But things have changed now.

The bigger piece of the pie would now have to be shared. So what really has been the taxation policy so far for this mushrooming and rampant gaming business? To understand this, let’s first deep dive into the anatomy of this industry.

There’s “Skill”, and there’s “Chance”.

A Game of Skill, as the name suggests, is one where the outcome is based on the expertise and judgment (and yes, some chance, too) of the player. On the other hand, a Game of Chance is sheer luck and is treated at par with horse racing, gambling, and betting. You must have seen some new apps promoting this during the last cricket tournament. 

So far, skill games have been attracting GST at 18%, and chance games are being taxed at 28% GST on the commission. The GST Council has now proposed not to differentiate between skill and chance and levy 28% GST on both!

But that’s not the climax of this GST movie!

Here is a bigger climax for you – the tax will not merely be on the commission amount but on the entire face value of the bet at the entry point. That means, on a ₹2000 pot of money, a gaming company will first levy a GST of ₹560. This will lead to more out-of-pocket tax expenses for players in addition to the commission amount.

Accordingly, the valuation of online gaming supply may be done based on the amount paid or payable to or deposited to the supplier by the player or on behalf of the supplier at the entry stage.

Let’s break it down.

Consider two people trying their luck at a game and depositing ₹1000 each. Let’s assume a gaming company, X, pools this money together. The pot is ₹2000. This deal also entails a commission for X, say 15%. As a result, X collects Rs. 300 on this amount as commission, on which they pay the government a GST of 18%, which amounts to around ₹54 in this case. This is how things have been so far. 

But now, this tax rate would be a whopping 28%. And that’s not it. The real concern is that the GST Council will levy the 28% tax not just on the commissions, but on the entire pot of money. 

The GST Council claims to have taken this decision after thorough consideration and believes this will lead to standardisation within the industry. FM states that 18% of GGR results in only 7-8% of net revenue. Whereas, 28% of GGR will result in 11-12% of net revenue. Further, these rates are lesser than rates charged on a few necessary household items.

For obvious reasons, this change is receiving a lot of flak, stating that this will be a major setback to the industry. Not only will it impact the customers since it would lead to a much lesser value for them, but also cause a significant blow to the industry at large. From what has already been witnessed post the Council meeting, there could be scammers coming up with dubious gaming apps, taking this situation to their advantage.

The GST Council did a follow-up Council meeting on 2nd August 2023 and stated that 1st October 2023 should be the date for implementing the new GST rate. Further, it plans to reconvene after six months to review the implementation.

The Council’s decision has been severely impactful, and it looks more like bringing down the industry in the name of uniformity. Is it just an attempt to standardise or a reaction to the GST Council’s recent defeat in a case against one of the gaming companies?

Recently the GST department claimed that one of the big gaming players owed them ₹21,000 crores in taxes, arguing that the company should pay 28% GST on the deposits it received from players. Previously, this gaming company had been paying 18% GST only on the commissions it earned.

However, the Karnataka High Court ruled in favour of the company, stating that the GST department’s attempt to claim more money was “arbitrary.” The court’s decision brought relief to the gaming industry, which had been supporting this player during the legal battle.

Will this new change by the government see pushback from the gaming fraternity? Is there a scope for some respite? It’s a wait-and-watch now!

For any clarifications/feedback on the topic, please contact the writer at isha@clear.in