India's online gaming business has seen an exceptional rise in the recent past. Registering a CAGR of 38 per cent in the last 5 years, India is among the top five global markets for mobile gaming. Online gaming in India saw a surge in growth as a result of the Covid-19 pandemic-induced lockdowns, with nearly 17 per cent of worldwide downloads by September 2020. Gaming firms in India have raised capital of USD 2.8 billion from domestic and international investors over the last five years, highlighting the country's enormous growth potential. Investor funding has increased by 380 per cent over 2019 and 23 per cent over 2020.
Acknowledging the potential and growth prospects of the industry, the Ministry of Electronics & Information Technology (MeitY) was appointed as the nodal ministry for the online gaming industry late last year. It was a huge win for the industry’s long standing request for a national level regulatory framework for a unified pan-India market and enhancing user protection. Further amendments to the IT rules were proposed a week after MeitY’s appointment, to address the concerns of government, users and industry.
With the number of users increasing exponentially and new engaging games releasing at a rapid pace, this positions India well to become an international gaming hub, as per the PM’s vision for the AVGC sector. However, intermittent hurdles have troubled the online gaming industry in the form of adverse legislations and erroneous interpretations. The AVGC task force, appointed by the Finance Minister, also found in its report that the lack of clarity over regulations was one of the biggest hurdles for the growth of the sector.
The Central Government has commendably worked on introducing draft regulations in IT laws to govern the sector with a uniform code, but certain issues still raise concern for this fledgling industry that has become a major contributor to the exchequer in a short time. The current levy of GST for the industry is at 18% on the Gross Gaming Revenue (GGR) or platform fee in keeping with best practices globally. But the lack of consensus in the recommendations of the Group of Ministers (GoM) constituted to suggest a taxation structure for the industry can undo the same. The lack of a defined, clear taxation also robs the industry of potential investment, which hurts the ability of the industry to maintain its rate of growth. With the original proposed rate of 28% GST to be levied on the entire contest entry amount, inclusive of the prize pool & the platform fee or the revenue of the gaming companies, the GST Council now needs to take a pragmatic view on this issue, as majority of the states in the GoM have done post reconsideration of the original recommendation.
As the GST Council mulls over the appropriate taxation structure, it is imperative that it looks at deriving historical context on the matter. Telecom industry is a big example of how over taxation impacted a fledgling sector. In the telecom sector, with the lowest tariff structure and initial high costs for licensing and spectrum, many telecom operators had to exit the industry for the lack of business viability. After very few major players were left in the market, the Central Government introduced a comprehensive reform package to allow the industry to recover and consolidate its position. At a crucial juncture where a rising populace needed commensurate data services, the relief package from the Centre allowed for a 4-year moratorium to operators on the payment of the adjusted gross revenue (AGR). This has been instrumental in the recovery of the telecom sector, assisting in the generation of liquidity, along with other regulatory measures such as allowing 100 per cent FDIs through the automatic route, providing the push to get the industry back on its feet.
On the other hand, the E-commerce industry is an example of how the Government’s conducive policies can enable the growth of an industry. In a bid to ease the process of intra-state supplies through e-commerce portals, smaller businesses and MSMEs have been exempted from obtaining GST registrations, commensurate to turnovers lower than INR 40 lakh for goods and Rs 20 lakh for services. With more entrants, the move ensures greater participation and increased tax revenues.
The pragmatism of the Centre in its legislative intent has been imperative in ensuring that industries across sectors have been enabled to flourish with the nudge of optimum taxation structures. With the onus on the GST Council to finalize the taxation regime for the online gaming industry, this progressive approach needs to be replicated again for the commensurate growth of the industry as well as its contribution to the economy at large.
The direct implications of taxing the entire contest entry amount is antithetical to the approach taken by the government in the pragmatic legislative intervention precedent to the current scenario, and holds dire consequences for the industry. With a rise in the taxation rate by about 56 per cent and change in value of supply to include prize pool, the tax payout could increase to 10 to 20 times the current figures, making the operation of the industry inherently unviable. Dwindling participation in light of the cost per game increasing by 3-4 times would be the death knell for an industry that is currently contributing more than Rs 2,200 crore by way of GST to the exchequer.
An appropriate taxation regime also needs to be cohesive in its statutory interpretation of taxable amounts. For Mutual Funds, there is a clear distinction on taxing the asset management fee (AMF), which is specifically to cover operating costs in the maintenance of the fund, and not impose taxes on the assets under management (AUM), which would cover the entire market value of the amounts invested. The same principle should logically follow for the online gaming industry where the GGR is subject to tax, as the revenue earned by the platform, but the prize pool is only held in a fiduciary capacity and completely redistributed back to winners of the contests.