Sports and video games have long been sources of joy, entertainment, and engagement for both participants and viewers. Online gaming inside it offers opportunities for on-demand, real-time engagement without any constraints of physical location and time zones. Online gaming has expanded due to COVID-19 and the associated social distancing conventions that have further compelled the populace to look into alternate entertainment and social interaction modes.

Every sector needs a robust regulatory and legal framework free of uncertainty to realize its full potential and guarantee that the company may grow swiftly. For every participant in the business, knowing whether a game is a game of skill or luck has significant ramifications. It frequently serves as the deciding element for how the law will affect corporate operations. It depends on the specifics of each situation whether a game falls within the category of skill or chance.

The GST Council had its 43rd meeting on May 25, 2021, and elected two Group of Ministers (GoM) members. The goal of the GoM was to handle issues regarding the Special Composition Scheme and capacity-based taxing in particular GST industries, including casinos, racetracks, and online gaming. Representatives of the GoM and the press recommended raising the GST imposed on online gambling enterprises from 18% to 28%.

GST on Online Gaming

Online games are now differentiated under the GST regime based on skill versus chance. A game involving skill is one in which the result is determined by the player’s skill, practice, and experience rather than just by chance. Rummy and fantasy sports games, including Dream 11, are a couple of examples. This distinction is crucial since skill games are eligible for a reduced tax rate. While betting, gambling or horse racing are all viewed similarly to games of chance. They are thus charged a higher GST rate under Rule 31A of the CGST Rules, 2018.

However, there is a problem, as the recent Gameskraft Technology case demonstrates; sometimes, it is difficult to distinguish between skill and chance. In order to entice a higher GST tax rate, the tax authorities combined all of its games, which include rummy, as games of chance.

• According to HSN 999692, a 28% GST on the entire bet value must be paid.
• Under HSN 998439, a GST charge of 18% is only applied to platform commissions or gross gaming income.

Compared to a game of skill, a game of chance entails betting or gambling practices and is subject to a greater GST rate tax. Since they are considered games of skill, the online games provided by industry participants must be lawful in India. Therefore, the distinction between gambling and betting affects the indirect tax effects.

How has the industry reacted?

Although the online skill-based gaming industry accepts the government’s choice to raise the GST from the existing 18% to a whopping 28%. Stakeholders in the industry contend that to protect the USD 2.2 billion business, it must be applied only to gross gaming income (GGR) instead of just contest entrance fees. There are rumours that the next GST Council might opt to raise the normal Goods and Services Tax (GST) rate of 18% on GGR to 28% on the complete amount.

As an industry, we are united on our ask that GST continues to be levied on the gross gaming revenue and not on the contest entry amount. The increase from 18 percent to 28 percent GST on the gross gaming revenue already increases tax revenue for the exchequer by around 55 percent.

Trivikraman Thampy, the co-chief executive officer of Games24x7

Although the industry can handle this, he continued that taxing contest entrance fees will make the sector unprofitable. In addition, consumers would need to bear the increasing financial burden of taxes, which will result in a ripple effect as gamers migrate to offshore gaming sites or the grey market, which are exempt from Indian taxation.

How is the GST Calculated?

Gaming platforms must currently pay GST in India since they are considered “suppliers” of services under the GST Act. Concerning pay-to-play games, a portion of the token cost that a user pays to a platform to utilize that platform’s services is often put in an escrow account (prize pool), and the platform as a service fee bills a portion and otherwise platform fee by that of the operator (GGR). Upon winning a game, the entire prize pool is added to the winners’ accounts. As a result, the GGR is now subject to an 18% GST tax.

A website that provides games keeps money in two different ways:

• A platform charge or entry fee (often between 10 and 20 percent) for playing the game.
• A part of the pot proceeds is set aside for prize payouts.

What is GGR?

One crucial metric that gambling and betting companies use is gross gaming revenue (GGR), also known as game yield. It displays the difference between the money wagered by players and the money won by them. It is crucial to remember that gross gaming revenue, as opposed to profit or earnings, is the same as “sales” or “revenue.”

CEA vs GGR

The Contest Entry Amount (CEA) is the complete amount placed by the player to join a contest on the platform, whereas GGR is the cost imposed from an online skill game platform as service charges to assist players’ participation in a game on their platform.

Future of Online Gaming in India

This industry is expected to have rapid expansion in the near future, both in terms of revenue creation and acceptance, as the country’s broadband/internet and PC coverage rise, particularly in non-metro and rural regions. Moreover, in a nation where 70% of people are under the age of 35, live online gaming is becoming increasingly popular among young people since it gives them a chance to unwind from their busy lives while still enjoying fun and excitement.

Conclusion

The online gaming business will likely have a sizable impact on the economy, given its size and predicted future expansion. Considering the potential and economic benefit, it is crucial to resolve the issues and offer a stable tax system when the sector is only getting started and will continue to expand. 

The functioning of online gaming firms is anticipated to be impacted by the rise in the GST rate of tax from 18% to 28%. The capacity to play games per user may dramatically decline due to the three to four-fold rise in player costs for each game, thus affecting the online gaming industry. The proposal to raise the GST rate is noteworthy since it was made in reaction to rising online game income and the industry’s expanding market dominance.