Retrospective GST taxation will kill the online gaming industry

Thiruvannathapuram S Ramakrishnan

In the age of technology and innovation, India’s online gaming industry has been steadily climbing the ladder of success over the past decade. The industry’s potential to create a thriving, tech-driven entertainment segment had not only caught the eye of domestic investors but also piqued the interest of international players.

The numbers were impressive, with industry estimates suggesting that the sector is projected to grow to $20 billion (Rs 1.6 lakh crore) by 2030 in terms of revenue. These figures now seem to be a distant vision, and the industry is staring at a black hole with the Directorate General of GST Intelligence’s (DGGI) decision to demand companies pay taxes, due several years prior, at 28% GST on contest entry amounts, despite the amendment to the GST law coming into effect in 2023.

While the GST Council has maintained that this is a clarification of the
intent of the GST law, the nature of the tax demands is nothing but
retrospective in nature.

With India’s ambitious mission of establishing a $1 trillion (Rs 80 lakh crore) digital economy, it was only natural for the government to recognise this burgeoning industry, and they did the right things in 2022 and early 2023 as well. The AVGC (Animation, Visual Effects, Gaming, and Comics) Task Force, introduced in the 2022 Budget and the Ministry of Electronics and Information Technology’s (MeitY) decision to regulate the sector were encouraging signs of progress.

In Budget 2023, some of the issues related to direct taxation were also addressed. The government acknowledged the uniqueness of the online skill gaming industry and the need to update existing laws to accommodate technology-led innovations and entertainment formats, acknowledging the sector’s legitimacy and further decoupling it from betting and gambling.

Despite all the positive signs from the government, the issue of indirect taxation remained unresolved.

Despite a strong legal precedent, including judgements from the Supreme Court as well as several High Courts, which have deemed games of skill as constitutionally protected businesses, the GST Council sought to impose a staggering 28% “sin tax” on the full face value of deposits, even though the industry had already contributed a sizeable Rs 2,200 crore to the exchequer based on 18% GST on revenues earned.

Revenues from India’s online gaming sector are projected at Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, according to a report by FICCI-EY. The rapid growth has also given a massive boost to the government’s tax collection target in this segment. The government is expecting a 10-fold rise in taxes from this segment in FY24, at around Rs 20,000 crore.

The GST Council defended its decision, claiming that it was merely clarifying existing tax laws and that the industry should pay taxes based on this clarification, regardless of the legal interpretation of the existing GST framework.

To make matters worse, the government appealed to the Supreme Court, challenging a Karnataka High Court decision that had previously stayed a Rs 21,000-crore notice from the DGGI raised on a single online gaming company, a tax demand higher than the entire revenue of the industry combined.

The retrospective tax demand has historically witnessed a massive legal battle for companies in the telecom and energy sectors, with the government forced to eat humble pie on both occasions. The DGGI has so far issued notices for retrospective tax dues for the period 2017–2022 to over 40 online real-money gaming companies, which comes to a staggering amount of over Rs 1.5 lakh crore.

These online firms have not earned this much to oblige the tax notice given by the DGGI, and hence they will be forced to wage a legal battle against the DGGI’s notice. Once it goes to the judiciary, it will neither benefit the government nor the online gaming companies, as the judiciary will take its own sweet time to give the final judgement.

In the meantime, the uncertainty surrounding the taxation of the online gaming business would kill the industry and it would be next to impossible to revive the online gaming industry. However, the growth of the online gaming industry globally would surge ahead, leaving India far behind.

For companies that have diligently followed compliance, this turn of events represents a severe setback with consequences far beyond missed growth opportunities. It poses a real and immediate threat to their survival, as they will struggle to meet the exorbitant tax demands.

Moreover, this debacle sends a clear message to innovators and investors: the regulatory landscape in India is murky and unpredictable. The Indian online gaming industry had attracted investor attention not only by demonstrating the promise of generating revenue but also fuelling growth in allied sectors such as fintech, artificial intelligence, data science, machine learning, advertising, marketing and even sports events.

The skill-based real-money gaming sector, with $2.5 billion in global funding and a vibrant ecosystem for game developers as well as allied specialisations, aligned with the prime minister’s vision of a gaming superpower. If the revised tax structure were to apply prospectively, there might still be hope for the industry to adapt to a new business model. The envisioned one lakh direct and indirect jobs it aimed to create in the coming years could still be realised, albeit at a slower pace.

However, if the government persists in its pursuit of excessive and retrospective taxation, it will be a significant loss not only for the online gaming industry but also for India’s aspirations to lead the technology revolution of the 21st century. It will deter foreign investments, hinder the growth of a progressive entrepreneurial ecosystem and stifle India’s potential as a globalised and progressive nation.

The government must reconsider its approach and recognise the importance of fostering innovation and entrepreneurship through sensible and supportive regulation. Otherwise, it risks killing the golden goose that could have laid many eggs for the future.

(The writer is a public policy expert)