MUMBAI: India's online gaming sector, valued at USD 3.1 billion, faces significant challenges related to regulation and taxation that could hinder its growth potential. A recent report by the United States India Strategic Partnership Forum (USISPF) and TMT Law Practice highlights concerns over the treatment of online gaming as a homogeneous industry, conflating skill-based games with games of chance or gambling.
This misclassification stifles the growth of India's online skill gaming industry. The report points out that India imposes a 28% Goods and Services Tax (GST) on total player deposits across all gaming formats, which is notably higher than global standards. In several countries, skill-based games and fantasy sports are categorized separately, allowing for distinct regulations and lower tax rates.
For example, skill-based games are typically taxed on platform fees or Gross Gaming Revenue (GGR), with rates ranging from 2% to 25%, while fantasy sports often incur higher taxes due to their unique business models. The report further emphasizes the need for India to adopt a more nuanced approach to taxation that aligns with international best practices.
The report highlights the regulatory frameworks and taxation policies in 12 key gaming markets, including the US, Germany, the UK, Denmark, and Belgium. The report also highlighted that the United Nations Central Product Classification (UN CPC), which forms the basis for taxation in domestic jurisdictions globally, defines online gaming separately from online gambling.
The report reveals that all 12 countries have a separate legal definition for games of chance, ensuring a clear distinction from skill gaming formats. 8 of the 12 countries’ laws or the regulator, also define fantasy sports for distinct regulation and/ or taxation.
Currently, skill-based games in India are taxed similarly to digital services, which may lead to over-taxation and push players towards unregulated offshore markets. The findings suggest that a clear distinction between games of skill and games of chance is essential for fostering industry growth and ensuring fair taxation.
"Notably, skill-based games receive unique treatment in all the 12 countries, treating them as a separate, standalone category. The tax rates for skill-based games are generally lower than those for games of chance," the report said.
“The US has been a significant contributor to India's gaming sector, with USD 1.7 billion out of the total USD 2.5 billion in foreign direct investment (FDI) coming from the US alone. This reflects the immense confidence global investors have in India’s rapidly growing gaming market, which is projected to become a USD 60 billion opportunity by 2034. Notably, 90% of this FDI is in the pay-to-play segment, which also accounts for 85% of the sector's overall valuation. With a large consumer base of over 600 million gamers, this space is rapidly being monetized and presents a substantial export opportunity," said Dr. Mukesh Aghi, President and CEO, USISPF.
" However, for Indian companies to compete on a global stage, we need a level playing field with progressive tax and regulatory policies that align with international standards. Our benchmarking of global gaming markets reveals how other countries have segmented, defined, taxed, and regulated the gaming industry based on formats he said.
"It is clear that, globally, there is a distinct separation between games of skill and games of chance, with skill-based games often receiving conducive treatment. Moreover, even within skill-based games, further differentiation is made to ensure appropriate regulatory frameworks that cater to separate business models. Sharing these insights will help ensure India’s gaming industry reaches its full potential while maintaining investor confidence,” added Aghi of USISPF.
"By conflating skill-based games with games of chance, we are stifling innovation and international competitiveness. A more nuanced regulatory and taxation regime, similar to those adopted in global markets, would not only provide clarity but also foster sustainable growth in the online gaming sector. It’s imperative that India aligns its policies with international best practices to fully unlock the sector’s potential and attract more global investment,"stated Abhishek Malhotra, partner, TMT Law Practice.