GST Review After 6 Months Keeps Gaming Industry On Edge, Experts Say MSMEs Won’t Survive Hike
On 2 August, the GST Council retained its earlier decision of levying a 28 per cent tax on the full-face value of money placed on online gaming, casinos and horse racing, but also held to the consideration of a review down the road.
The decision to impose a 28 per cent tax will come into effect on 1 October, as conveyed by Finance Minister Nirmala Sitharaman after the 51st GST Council meeting. The Council further added that it will review this decision to impose 28 per cent GST on online gaming and casinos after 6 months.
While heading the GST Council’s meeting, the Finance Minister stated that the centre will introduce an amendment to the Goods and Services Tax (GST) law in the current Parliamentary session to levy the newly introduced taxation, despite dissent from Sikkim and Goa over the modalities of the tax for casino users.
The Delhi government’s representative sought a fresh review for the online gaming sector, but most other States leaned towards sticking to the Council’s decision last month, which had been taken after three years of deliberations, the Finance Minister conveyed after the virtual meeting.
The participants from the meeting in New Delhi on 2 August 2023, were Union Finance Minister Nirmala Sitharaman with Union MoS for Finance Pankaj Chaudhary and Revenue Secretary Sanjay Malhotra.
MSME's Apprehension and Impact on Revenue
Expressing apprehension around the impact of this decision, the All India Gaming Federation in a statement (AIGF) delineated, "We believe the decision by the GST Council of valuation on deposits will severely impact the online gaming sector and result in a situation where a majority of players, including the MSMEs, will no longer be able to survive in the face of the increased tax liability of 400 per cent. Additionally, companies at their early growth stages, particularly those within the startup and MSME sectors, will be disproportionately impacted."
AIGF further mentioned that only established and well-entrenched skill gaming companies may be able to scrape through this change by using their existing capital reserves to counter the effects of substantially increased tax liability.
"However, even their revenues and valuations will significantly fall. And the rampant illegal offshore gambling websites will thrive as efforts to block them have been ineffective till now," it added.
Review After Six Months
Over the council’s decision to review this taxation change after 6 months, Badri Narayanan, Executive Partner, Lakshmikumaran and Sridharan Attorney said, "The Council’s decision to review the tax policies after a period of 6 months will instill a sense of assurance on the effectiveness of measures put in relation to offshore gaming players and impact on the user base of the sector. The tax measures proposed for offshore gaming are similar to the OIDAR mechanism. We need to see the tandem operation of IT intermediary rules and GST tax provisions for offshore gaming."
On this, AIGF mentioned, "We sincerely hope that, as mentioned in the meeting, there will be a rethink after six months and a stable and progressive regime can be proposed, which will help the industry grow, provide safe platforms to digital nagriks, while increasing tax revenues and contribute to the vision of India becoming a global gaming powerhouse."
However, expressing a contradictory view from the gaming body above, Narayanan on the development, said, "The Council’s decision to levy GST on deposits made at entry level has brought a sigh of relief for the sector. The council has recommended parity in treatment for casinos and online games of skill. With the said amendment, the valuation mechanism for Casino and Online gaming is kept at par, i.e., GST will be charged only on the value of coins purchased and money deposited in wallets, respectively, rather than levying GST on each game played."
Narayana further conveyed that this is a welcome clarification for industry stakeholders. "The decision is in alignment with the recent developments in income tax provisions linked to the deposit of an amount into a wallet. Bank-to-bank transfers of money will ease transparency, traceability, and monitoring for stakeholders. We need to await the fine print of amendments in relation to definition, place of supply, offshore gaming, etc.," he added.
Court's Decision & Virtual Digital Assets
Sitharaman further delineated that the Delhi finance minister opposed the 28 per cent taxation on online gaming, while Goa and Sikkim wanted the levy on GGR (gross gaming revenue) and not on face value.
"The implementation of the amendment (prospective or retrospective) for the past period will be based on the decision taken by the Apex Court in the Special Leave Petition Court challenging the decision of the Karnataka High Court in the Games Kraft matter. This will result in the precarious situation of current investigations being continued until finality is obtained in SC," Narayana commented on the judiciary trajectory ahead.
Commenting on the use of cash to play online real-money games, Narayana stated, "Recognition of the use of Virtual Digital Assets (VDA) as cash to play online real-money games is a positive development. Acknowledging the use of VDA as a legitimate mode of payment is in line with global VAT developments."
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