India’s 28% Online Gaming Tax Is a Major Challenge for Operators

India’s Goods and Services Tax Council on July 11 announced that all online gaming businesses would uniformly be subject to a 28% tax on the full face value of services, including the value of the bets placed. This decision is a major setback for gaming operators in India and investors in the sector, as it’s likely to stunt the growth of a booming gaming industry with a projected valuation of $3.8 billion by 2024.

Proposed Changes

While previously an 18% tax was levied on the commission earned by the gaming operators, or “rake fees,” the council’s decision both increases the rate of tax and expands the base on which this tax is applied. For example, an online gaming platform that charges a 15% commission on the face value of bets would earn 15 Indian rupees ($0.18) for every 100-rupee bet placed, with the remaining 85 rupees distributed as winnings to the player. Previously, an 18% tax was levied only on the commission of 15 rupees, amounting to a tax of 2.7 rupees. The council has now adopted a 28% tax on the entire face value of 100 rupees, amounting to a tax of 28 rupees, effectively constituting a 1,000% increase in the tax burden.

Additionally, the revenue secretary stated that the announcement merely clarifies the present regime of taxing online gaming, raising concerns that the GST Council’s decision may be implemented as a clarificatory amendment with retrospective application, as was done in the Vodafone case, shaking investor sentiment. A 28% tax on face value imposed on past operations would come with claims of penalties and interest for non-payment, which would result in litigation.

Impact on Gaming Operators

The effect of the application of a retrospective tax at a high rate of 28%, and on the entire face value as the taxable base, would be to drive companies to leave India. As an example, Portugal and Poland, which respectively levy 8% and 12% tax on face value, have struggled to attract gaming companies, with over 60% of platforms and customers opting for unlicensed gray markets.

The gaming industry was expected to generate over 100,000 jobs and attract over $95 million in foreign direct investment. However, with the Finance Bill 2023 introducing a 30% tax deducted at source on the net winnings, the combined effect of players heavily taxed on winnings and operators taxed over and above their earnings creates a hostile environment, significantly deterring future investments.

Legal Challenges

Gaming companies must brace themselves for extensive litigation. Tax authorities that were awaiting clarity from the GST Council are now likely to file notices against 40 online gaming companies, with total liabilities of over $1.2 billion. Decisions such as Gameskraft Technologies and Bangalore Turf Club that struck down the imposition of a 28% tax on face value are expected to be appealed.

Challenges to the council’s decision can be made on multiple fronts. First, under India’s GST framework, the tax must be imposed on the consideration received for the “supply” of goods and/or services defined under Section 7(2) of the Central Goods and Services Tax Act, and on the supplier of such goods defined under Section 2(105). Thus, to levy a tax on the stake value, the operator who is the supplier must supply the bet, which is the good on which the tax is imposed. However, as held in Gameskraft, operators are mere intermediaries who don’t supply bets to players.

Additionally, Section 15 provides that the transaction value of the supply on which GST is imposed is the price actually paid or payable for the good and/or service. The entire bet value isn’t the price paid for the service. It’s merely pooled and kept by the operator for a brief period of time in a fiduciary role to distribute back to the players as prize money. The only consideration paid for the services the platform provides is the commission charged for participation. Therefore, as rightly pointed out in Bangalore Turf Club, the tax can only be levied on the commission earned by platforms, and not for all monies that pass through them, similarly to how stockbrokers or travel agents are currently taxed.

Moreover, the Supreme Court has held that land taxes levied without due regard for the production capacity or income that could be derived constitute expropriatory taxes levied with the intent of confiscating private property. On similar grounds, taxing a platform over and above its earning capacity, without regard to the commission actually received as income and rendering it completely unviable to operate as a business, constitutes an expropriatory tax vulnerable to constitutional challenges.

Way Forward

Apart from litigating the enforcement of the council’s decision, gaming platforms must make representations to the government to mitigate the impact of the changes. The revenue secretary stated after the council’s decision that “online games when played without stakes continue to be taxed at 18%,” while the council’s decision states that online gaming would attract a 28% tax on face value. This invites further uncertainty as to which platforms tax would be subject to tax at 18%.

Furthermore, representation to the government highlighting the recognized nature of online gaming and e-sports as legitimate activities is necessary to prevent the imposition of the same punitive sin tax currently applied to gambling.

If the CGST Act is amended, companies will be forced to transfer operations out of India to remain commercially viable. However, such offshore companies will also attract payment restrictions under the Foreign Exchange Management Act 1999 that domestic operators wouldn’t be subject to, resulting in a further loss of business.

In conclusion, while the GST Council’s announcement ended a year-long deadlock on taxing online gaming, it provides little relief to gaming companies. It remains to be seen how courts that have so far struck down the imposition of a 28% tax on face value will now respond to challenges on this decision.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Meyyappan Nagappan is a partner with Trilegal. Saranya Ravindran and Eeshan Sonak are research assistants with Trilegal.