The Economic Impact of Fair Taxation in India’s Online Skill Gaming Industry
According to international best practices, the research suggests taxing online games based on GGR and establishing tax rates between 15-20% on GGR to increase tax collection.
India’s online skill gaming industry has witnessed tremendous growth in recent years, driven by increasing smartphone penetration, improved internet connectivity, and the rise of digital platforms. Skill-based games such as poker, rummy, fantasy sports, and online quizzes have gained popularity, attracting millions of users and creating a burgeoning market.
However, with this growth comes the need to establish a fair taxation framework that ensures transparency, fosters industry growth, and generates revenue for the government.
The digital revolution in India has expanded the online skill game market. According to research recently published by Lakshmikumaran & Sridharan Attorneys examining the Group of Ministers (GoM) recommendations on GST for online gaming, the size of the gaming business in India is anticipated to be $2.6 billion in FY22. It is expected to reach $8.6 billion by FY27.
India’s online skill gaming industry operates in a regulatory grey area, with no specific legislation or guidelines governing its taxation. The lack of clarity has led to inconsistent tax treatment across different states, creating ambiguity for operators and players alike. Presently, the tax implications on the industry are primarily based on existing provisions related to gambling, which often do not adequately capture the nuances of skill-based games.
Challenges and Considerations:
Distinguishing Skill from Chance: Skill-based games are distinct from games of chance, as they require a certain level of skill, knowledge, and strategy to succeed. The taxation framework must differentiate between games predominantly based on skill and those based solely on chance. This distinction will help prevent undue burden on skilled gaming operators and ensure fair taxation.
Revenue Generation vs Over-Taxation: While taxation is necessary to generate revenue for the government, excessively high tax rates can stifle industry growth and discourage operators from operating within the legal framework. Striking the right balance between tax rates and revenue generation is essential to foster a thriving skill gaming industry while ensuring a fair contribution to the exchequer.
Regulatory Framework and Licensing: Establishing a robust regulatory framework specific to online skill gaming will provide a clear path for taxation. Licensing requirements for operators, adherence to responsible gaming practices, and the implementation of age verification mechanisms can be critical components of this framework. The tax could be closely tied to the licensing process, ensuring compliance and transparency.
Proposed Path to Fair Taxation:
- Defining Skill Gaming: The first step is establishing a legal definition of skill gaming, distinguishing it from games of chance. This definition should consider the predominant influence of skill, the element of randomness, and industry best practices.
- Harmonized Tax Structure: The central government should work with state governments to develop a harmonized tax structure for skill gaming operations. This structure should be transparent, reasonable, and reflective of the nature of the industry. Based on revenue or turnover, a moderate tax rate could be levied on operators while considering their size and financial capabilities.
- Regulatory Framework: A comprehensive regulatory framework should be developed to address licensing, responsible gaming, player protection, and tax compliance. This framework should outline licensing requirements, periodic audits, and operator reporting obligations. Taxation should be linked to licensing, ensuring compliance with regulatory norms.
- Player Winnings: Individual players’ winnings should not be subject to direct taxation, as it is akin to taxing personal income. However, operators should be required to deduct a small withholding tax from high-value winnings, ensuring fair taxation without discouraging player participation.
- Promoting a Competitive Environment: To encourage fair competition and prevent monopolies, the taxation framework should consider incentives for smaller operators, such as tax exemptions or reduced rates for startups or businesses with lower turnovers. This will foster a diverse ecosystem and provide opportunities for new entrants.
According to the report, the first Group of Ministers (GoM) report should be reevaluated in light of recent judicial decisions and legislative changes. According to jurisprudence created since the 1950s, it suggests deciding whether or not online games of skill are taxable based on how they differ from lotteries, wagering, gambling, and wagering. To establish a clear legal status, “permissible online real money games” must be certified under the IT Act and Rules. The article responds to statements made by Union Finance Minister Nirmala Sitharaman in South Korea, in which she said that the GST Council is thinking about taxing online gambling, which might draw additional investments if the tax structure is implemented.
The report also recommends taxing legal real-money online gaming based on Gross Gaming Revenue (GGR) to conform to international standards. Tax rates on GGR between 15 and 20 per cent are advised to raise tax revenue and follow international norms. Additionally, it suggests taxing online games based on GGR, in line with international standards and offers tax rates between 15-20% on GGR to increase tax income.
The growth of India’s online skill gaming industry presents opportunities and challenges, especially in taxation. A path to fair taxation requires a well-defined regulatory framework, harmonized tax structure and clear differentiation between skill-based games and games of chance. By adopting these measures, India can create a fair and transparent taxation framework that supports the industry’s growth, protects players, and generates revenue for the government, ensuring a win-win situation for all stakeholders involved.
