Online gaming tax raised to 28% on net revenue, industry expresses shock

The 50th meeting of the Goods and Services Tax (GST) Council, held on Tuesday, decided to tax online gaming companies in India at 28% of their gross revenue, or full face value of transactions and entry fees paid by gamers—putting to end months of efforts from the online gaming industry urging the Centre to tax the sector on their net earnings, and not net revenue.

So far, online gaming companies paid 18% GST on their net earnings. Alongside the new tax regime, Union Finance Minister Nirmala Sitharaman said at the post-meet press conference that online gaming services “are not actionable claims”.

The taxation verdict could be a major setback for the online gaming industry. Industry regulators and stakeholders expressed shock, stating that such taxation could risk making online gaming businesses unviable in India.

“Most online gaming ventures in the country, including the ones that have scaled up, do not have an operating margin of more than 7-10%. Imposing a tax liability of 28% on total revenue would leave them with a tax quantum of potentially 3x of what they earn, and exponentially higher than the tax that they currently pay. This is practically impossible for the industry to pay,” said a senior policy advisor to online gaming companies under condition of anonymity.

The advisor added that while the fine print to the new tax regime is yet to be scrutinised, it is likely that the verdict will be challenged in the court.

Jay Sayta, a technology and gaming lawyer, concurred, adding that the new regime may take a while to be imposed.

“Since it has been decided by the GST Council that amendments have to be made to Entry 6 of Schedule III of the CGST Act to exclude online skill-based gaming from the ambit of actionable claims and correspondingly all 28 states will have to amend their state GST laws to reflect this position, it will take at least 5-6 months to bring into force this changed rate and manner of valuation of taxation for online skill gaming industry,” Sayta said.

“The differential treatment for games of chance like casinos, and games of skill played in online gaming, is arbitrary—and will face legal challenges. This decision will have an adverse impact on the nascent sector and future investments,” said L Badri Narayan, executive partner at law firm Lakshmikumaran & Sridharan.

Gaming firms, too, expressed surprise. Bhavin Pandya, co-chief executive of online gaming firm Games24x7, said that the verdict “creates a hostile environment for legitimate domestic platforms with an unrealistic tax burden, and is counterintuitive to the measures that the government has taken to promote this sunrise sector.”

“Imposing GST on the full face value will render the legitimate online gaming industry unviable, effectively driving consumers towards offshore and illegal platforms that pay no taxes, resulting in loss of taxes and outflow of foreign exchange,” he added.

Roland Landers, chief executive of online gaming body All India Gaming Federation, said that the decision “is unconstitutional, irrational, and egregious. The decision ignores over 60 years of settled legal jurisprudence and lumps online skill gaming with gambling activities.”

Two senior lawyers who represent multiple online gaming firms further added that the new tax regime, once passed into law, will almost certainly be challenged at the apex court. One of them said that while the Centre likely took precedent from the lottery industry, while the other added that it is unlikely that the new tax regime will impose retrospective sanctions on the sector—which could further hurt it.