Online gaming industry has potential to generate US$2b by 2023: EY-AIGF report

August 12, 2021

The Indian online gaming sector reached US$1.027 billion in 2020, a growth of ~17.3% from US$543 million in 2016. With its current trajectory, it is expected to reach US$2 billion by 2023 in terms of rake fees earned, states the EY- All India Gaming Federation (AIGF) report ‘Online gaming in India – The GST conundrum.’ While India is currently the fourth largest online gaming market globally, the industry requires a robust regulatory and legal environment to help the business scale quickly and achieve its true potential. The report highlights global best practices for taxation and provides much-needed clarity on aspects related to valuation and applicable GST rates.

Online gamers in India are estimated to grow from 360 million in 2020 to 510 million in 2022. Additionally, there are over 400 gaming start-ups at present that are accelerating the growth of the sector. However, in India, the classification of whether a game comprises a ‘game of skill’ or a ‘game of chance’ has wide consequences for legal implications on the business operations. A game of chance attracts a higher GST rate of tax vis-à-vis a game of skill. Online games operate either on the ‘rake fee’ model wherein the gaming platform charges a rake fee for facilitating games or ‘freemium’ models wherein the gameplay is free but additional features may require users to purchase specific items for a monetary price. A rational imposition of Goods and Services Tax (‘GST’) is therefore vital for sustaining this industry.

Bipin Sapra, Partner – Indirect Tax, EY India, said, “The online gaming industry is growing at an impressive CAGR of over 20% and holds significant potential for economic growth, job creation and contribution to the Government’s vision of a trillion dollar digital economy by 2025. To enable the industry in realising its peak growth potential, it is imperative that the GST regime for online gaming industry is kept rational and at par with other technology platforms. Adopting globally consistent standards in our tax treatment of the industry will enable it to achieve its true potential.”

Roland Landers, CEO, All India Gaming Federation, said, “The valuation disputes under GST law have been a dampener to the industry. Considering the market size and future growth projections, the online gaming industry is expected to be a significant contributor to the government’s vision and provide future economic avenues considering the ubiquitous digital trends impacting our lifestyle. It is important to highlight that regressive taxation of these emerging sectors may only make the business unsustainable in India. Our recommendation is that the Tax authorities should align its policies with internationally accepted principles of taxing the online gaming sector and provide certainty to the industry. We hope that this report would provide meaningful insights and help accord focus to this sunrise industry.”

To realize the full potential of online gaming industry, a levy of standard GST/VAT rates is recommended, to be treated on par with any other segments of the economy.


Crystallizing the GST levy mechanism

The valuation mechanism in levying GST on the entire stake value vis-à-vis the rake fee element should be clearly outlined to avoid any ambiguities and potential litigations leading to tax demands. Any uncertainty and possibilities of litigation adversely impacts the business plans, operations, and entry of new players in the industry. Most industry players have a rake fee in the range of 4% – 20%. Any attempt to levy GST on the entire stake value potentially leads to economic unviability of the business model and could force the closure of businesses.

The report outlines three options:

  • GST on rake fee value: This suggests a levy of GST only on the rake fee i.e. consideration received by the gaming platform. It is presently being followed across the industry and is in alignment with existing GST mechanism to levy tax on consideration only.
  • Deemed credit model: This has only two data metrics to be considered – stake and pay-outs. This mechanism makes it easier for the Government to verify and audit entities. However, businesses would be required to undertake a change in their ERP systems to compute GST.
  • GST on entire stake value but at a nominal rate of say 1.8%: This is simpler to calculate as it has only one data metric to be tracked by business i.e. stake value. However, the mechanism would be discriminatory for industry players having low rake since GST outflow would be high whereas margins are lower. This method is also prone to manipulation where ‘platform fee only’ players without any prize-winning model may offer nominal winnings to lower tax outflow.

Given the online gaming industry acts as a technology enabler and facilitates gameplays through a web platform similar to software companies’ products, the report recommends a GST rate of 18% to be levied to mitigate any risks of misclassification of the online gaming industry as betting or gambling. The tax rate should not exceed 20% as it could result in the gaming operators as well as consumers entering the grey market.

Singapore, South Africa and Australia follow the deemed credit model mechanism making it easier to verify and audit the entities. The model is in line with judicial decisions and also takes care of anticipated risk around the misdeclaration of rake fees.

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