By Rupin Chopra and Apalka Bareja
According to the India Brand Equity Foundation, the Indian online gaming market is currently valued at USD 2.6 billion and is projected to reach USD 8.6 billion by the year 2027. Such staggering growth is fueled by a burgeoning population of youth in India with access to affordable internet data and an unregulated online gaming industry, making the sector seem ripe for continuous growth in the foreseeable future.
In light of this, it is pertinent to take note of the recent and upcoming steps by the government to introduce an effective tax and regulatory regime for the online gaming sector.
Inclusion of Online Gaming under GST
Since the seminal verdict of the Bombay High Court in the case of Dream 11, wherein the Hon’ble Court not only declared Dream 11 to be a game of skill but also exempted it from the purview of Central Goods and Services Tax (CGST) Act, 2017; which otherwise levies a GST of 28% on betting and gambling games. The Hon’ble Court reasoned in favour of Dream 11 and adjudicated the pooled amount to be an actionable claim thereby excluding the levy of GST under the CGST Act.
Since then, there has been an uptick in demands to include online gaming under GST. In furtherance of this the Hon’ble Finance Minister, Ms. Nirmala Sitharaman, recently apprised stake holders regarding the upcoming steps to be taken by the government to streamline and regulate the sector.
According to the Hon’ble Minister, a clarity in relation to regulatory and taxation policies would aid in attracting foreign investments in the sector. In the upcoming GST Council meeting, inclusion of online gaming under the ambit of GST will be deliberated upon.
While the deliberations are scheduled for June, the potential impact of bringing online gaming under GST in India would primarily depend on various factors such as the tax rate levied on game winnings, the type of games, and the target audience. Some of the potential impacts are as follows:
1. Increased costs for consumers: If online gaming is taxed under GST, the cost of playing games may increase for consumers. This could make gaming less accessible, especially for those on a tight budget.
2. More compliance requirements for gaming companies: Gaming companies would need to comply with GST regulations, which could be a challenge for smaller companies or indie game developers.
3. More revenue for the government: The Indian government would generate more revenue from the taxation of online gaming. This could be used to fund social welfare programs, infrastructure projects, and other initiatives.
4. Shift in gaming patterns: Some consumers may shift to playing free-to-play games or switch to physical games that are not subject to GST. This could lead to a decline in revenue for companies that offer paid games.
Therefore, bringing online gaming under GST in India could open a Pandora’s Box of challenges and opportunities.
In light of the astonishing but untamed growth of this sector, the 2023-2024 Union Finance budget brought a plethora of updates in relation to, hitherto, untamed online gaming industry. The budget introduced the following new provisions:
- 30% tax on net winnings from online gaming at the time of withdrawal of such winnings by the player or at the end of the financial year.
- Removal of Rs. 10,000/- threshold for levying tax deducted at source (TDS) on winnings accrued to players under section 194B of the Income Tax Act, 1961 (IT Act).
- For effecting the aforesaid, the budget added section 115BBJ to the IT Act which now defines the terms “computer resource”, “Internet” and “online games” and excluded winnings from online gaming from the ambit of section 115BB. The new norms will be applicable from April 1, 2024
Prior to the steps undertaken in the 2023 budget, income from winnings of real money from online games was taxable under the head “Income from other sources” under section 115BB of the IT Act. Unlike income of professional streamers, no deductions are allowed, and tax is chargeable at a flat rate of 30% + applicable cess and surcharge (irrespective of the quantum of winnings) on the gross winning amount credited to the player’s account. Before the latest proposal the online gaming community enjoyed a threshold of Rs. 10,000/- beyond which TDS was levied. It was observed that some gaming companies were tweaking/modifying the payout into installments or giving vouchers along with money prizes to circumvent the aforesaid threshold.
Guidelines on Online Games
The Ministry of Electronics and Information Technology notified the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (Rules) vide gazette notification dated April6, 2023 introduced the following noteworthy provisions with an intent to regulate and provide industry led checks and balance regime for the online gaming sector:
- As per the Rules an online game is any game accessible over the internet by using a computer resource or an intermediary. The intermediary here stands for online gaming intermediary defined as any intermediary which allows user to access one or more online games.
- According to the Rules if a game involves making a deposit of cash or kind in expectation of earning winnings on such deposit, such a game is an online real money game. Further, if such online real money game is verified by an online gaming self-regulatory body to be in compliance with the Rules, it shall be characterized as a permissible online real money game.
- The Rules have introduced the concept of online gaming self-regulatory body which will act as a body designate to verify if an online real money game is permissible online real money game or not. The Rules provide for multiplicity of such bodies, preferably catering to different genres of online games.
Further, Rules have also provided for the mechanism of designating the aforementioned industry based self-regulatory bodies and have imposed prohibition on wagering games.
In light of this, the Rules will act as a way to bridge the gap between unrestricted markets and a holistic regulatory environment to prevent malfeasance. Furthermore, the Rules have provided much-needed regulatory clarity vis-à-vis which game can be classified as an online game, and most importantly, which online real money game is permissible and which is not.
The aforesaid updates bears significance, especially considering the gigantic opportunity laying bare in relation to potential for attracting foreign investment and generating employment. This is not a mere assertion, data shared by the Union Government’s Invest India portal showcases the lucrative nature of this sector. As per the data :
- India is world’s largest mobile gaming market in terms of App downloads.
- India has produced 3 gaming unicorns: Game 24X7, Dream11 and Mobile Premier League
- Between Jan-Sep 2021, USD 1.6 billion were received in funding and M&A, with Real Money Games attracting approximately USD700 million.
- India has the largest fantasy sports market, with a user base of 130 million.
In conclusion, the online gaming sector in India has witnessed a remarkable growth in recent years, with the advent of advanced technology and increasing internet penetration. However, the introduction of provisions levying TDS on winnings from online gaming in the Indian Union Budget 2023 and the new amendments to the Intermediary Guidelines and Digital Media Ethics Code may raise concerns among some quarters of the gaming community. Further, the inclusion of online gaming under the GST regime is still a matter of speculation with both pros and cons for the industry. While these developments may pose challenges, it is essential for the industry to work closely with policymakers to ensure a fair and conducive environment for growth, innovation and revenue generation. Overall, the future of the online gaming industry in India remains bright, with the potential to leverage emerging technologies and reach new heights as the uptick in enthusiasm surrounding this sunrise sector is all encompassing, from consumers to law makers, everyone is holding high hopes for steady growth in the sector. An effective and robust taxation and regulatory regime is the need of the hour for the sector.
Shantam Sharma, Intern at S.S. Rana & Co. has assisted in the research of this article.
Gurdeep Singh Sachar V. Union of India & Ors. Criminal Public Interest Litigation Stamp No.22 OF 2019
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