Settle the legal status of online gaming companies
Online gaming, casinos, and horse racing will attract a higher goods and services tax (GST) of 28 percent as against the current 18 percent from October 1. The move standardizes tax treatment for similar activities across the country but is likely to have a significant impact on the online gaming industry.
Not only is a higher GST rate being imposed on the sector, but it is also applicable to the full value of the bets placed by customers, unlike the current model where GST is levied only on the platform fee charged by gaming operators. Following the revised GST levy, the cost of online gaming will increase for users regardless of whether they win or lose. As the GST is an indirect tax, operators will pass it entirely on to consumers.
The decision has led to a standoff between gaming companies and GST authorities for two reasons. One, the gaming industry wanted to retain the distinction between games of skill and games of chance while determining the legal status and tax framework. It argued that games of chance constitute gambling, whereas games of skill do not, and hence they cannot be grouped together. But the government maintained that gaming is not an essential service and needs no tax concessions.
Finance Minister Nirmala Sitharaman noted that the idea was to tax the value generated by these activities rather than classifying them based on their nature, putting to rest the debate over reclassification. The other issue pertains to the spate of show cause notices issued by the authorities, raising an estimated Rs 1 lakh crore of tax demands on the gaming industry.
The affected companies have challenged the demands, contesting that the 28 percent levy was imposed retrospectively though the amendment comes with prospective effect. Besides, a host of online gaming companies and casinos claim to have received notices for non-payment of past years’ GST on the full face value of bets placed on their platforms, as against the practice of paying tax on the gross gaming revenue earned in platform fees.
The reason is that these tax demands far exceed the revenue collected by the companies and complying could force them to shut down or file for bankruptcy. For a smoother rollout, the government must resolve the legal dispute swiftly apart from ensuring that the higher tax rates do not pave the way for illegal gaming operators.