Online gaming

The GST Tax Online Game Riddle

By SK Reddy

One of the biggest challenges facing governments today is the rapidly changing nature of the digital economy, with which regulators are struggling to keep pace.

In fact, the challenge posed by technology-enabled services means that even if one or a few countries develop regulations, businesses can simply move to another jurisdiction where the regulations suit them better. Yet the absence of any regulation can wreak havoc.

The collapse of crypto and the resulting freezing of transactions by some platforms is a telling example. Rapidly changing but unregulated product offerings have left millions exposed to 70-100% erosion in value and wiped out lifetime savings for some.

The online gambling industry poses a somewhat similar challenge to regulators. Globally, the industry caters to more than two billion consumers seeking entertainment, with services provided by a rapidly growing multi-billion dollar industry. For example, data published by the Entertainment Software Association (ESA) and the NPD Group, in the United States, shows that overall consumer spending on video games was US$60.4 billion in 2021, or an increase of 8% compared to 2020.

This figure includes revenue from all content categories, including hardware, subscription spend across console, cloud, mobile, handheld, PC and VR platforms. Microsoft has announced the acquisition of the American company Activision Blizzard, for the staggering sum of 70 billion US dollars. While Activision Blizzard is highly profitable with annual revenue of $8.8 billion and profits of US$2.7 billion, even the cash-burning game company Roblox boasts with a market capitalization of nearly US$24 billion. Roblox offers 20 million games with an average of 32.6 million people logging on each day, according to a report on Bloomberg. The company has also plunged into the metaverse with model Karlie Kloss, the latest celebrity on board.

The All-India Gaming Federation, which claims to be the apex industry body for online gaming self-regulation in India, comprises 70 online gaming companies and claims a combined user base of 4.5 crores . According to their projections, the Indian industry is poised to reach 30,000 crore in revenue by 2025. Reportedly, investment in the industry is increasing rapidly with Rs 17,500 crore having been invested. There are many other small and micro IT companies involved in gaming. Financial Express (29.6.22) reported that there are over 950 online gambling companies in India. Several companies are sole proprietors, offering games they have developed on Google’s Play Store and Apple’s App Store. Most of these games are free to download, although the consumer may be bombarded with unsolicited, sometimes obscene, or even worse, almost pirated advertisements.

Paid games are available for a one-time or monthly subscription. There are also more complex pricing models involving the purchase of in-game credits. And then there are competitive online games, like which is said to have a subscriber base of 57 million with over 400,000 players. online at any time. Online games include card games (bridge, rummy, poker) roulette, boxing and war games. Readers will recall the rage created by the PUBG game developed by Chinese mega-corporation – Tencent.

According to Tencent Games, there were nearly 175 million PUBG Mobile users in India and they claimed to have 1.5 crore daily users. The most eye-catching story is that of Dota 2 which is played with teams around the world. There are professional leagues and tournaments – an event format known as the Dota Pro Circuit. The international tournament is crowd-funded with prize money reaching over $40 million, making Dota 2 the most lucrative esports in the world.

The Indian government has set up a committee of secretaries to review the regulation of the online gambling industry. This move is on point. India would do well to position a National Gambling Commission under the Home Ministry, as the supreme and appellate body along the lines of the GST Board, while states could similarly structure national gaming commissions.

Most developed countries have gaming commissions and develop gaming laws. These organizations are currently dealing with vexing issues such as underage gambling and addiction. In a report published on Bloomberg on June 29, 2022, it was said that the United Kingdom was considering capping bets between the pound sterling of 2 to 5 for online casinos and banning free bets, while putting update its 17-year-old gambling legislation. There is also a proposal to require online casinos to implement “affordability checks” to show how much a user can safely spend. China has even taken a step ahead. Online games require regulatory approval before they can launch. After a nine-month hiatus, Chinese regulators approved new online games in April 2022. Approvals had been suspended due to concerns about child addiction or compliance with Communist Party values.

A Group of Ministers (GoM), chaired by the Honorable Chief Minister Sangma, a former Wharton, is studying a tax regime for casinos, online gambling and horse racing. The media is full of reports of a 28% tax being imposed on online gambling. The industry is up in arms against GoMon’s reported recommendation on the grounds that it would kill off a fledgling tech industry. It is said that companies will move underground or to other jurisdictions posing implementation problems for regulators, whether under OIDAR (the GST law allowing foreign service providers to pay the tax for services rendered to individuals in India) or for income tax equalization purposes.

The task facing the GoM is by no means easy. Rapidly evolving technology, huge subscriber bases and huge revenues have made online gambling a heady mix of entertainment and high-stakes gambling. Intellectually stimulating games like crossword puzzles at “parimatch” (Slogan: “Play online to win real money”) from a Cypriot-registered, Ukrainian-based gaming company dot the landscape. The rapidly changing game scenario is a nightmare for any tax administration. How to monitor when a game creates a pot of money to collect for a winner (“actionable action”) or when a player is simply spending time and money having fun in competitive esports is a problem. Then there are parity considerations, such as casino owners citing the case of online casinos and card games for reduced taxes.

While the online gambling industry makes much of the concept of “skill versus luck”, which emerged from the SC judgments in Sunrise Associates (2006) and Skill Lotto (2020), the argument is quite specious in the current technological landscape. .

The lines of demarcation have become blurred due to the features contained in the games which make this classification a very difficult task. Basically the orientation post could be a prize money (actionable claim) and differentiation between user pays but gets nothing but entertainment vs pot of winnings , should determine tax rates. This undoubtedly represents a difficult task for the tax administration, but it is time to build capacity and self-regulation to manage the current complexities of the digital economy. Whatever the Board’s decision, it would be tragic if the administrative convenience of GST officers alone justified the tax rate decision.

(SK Reddy, IRS. The author is a retired commissioner.)

(This report was published as part of the auto-generated syndicate newsfeed. Other than the title, no edits were made to the copy by ABP Live.)