The Fate of Indian Online Gaming: Is the GST Regime Dealing a Fatal Blow?
The GST Council bowled a googly. They declared they would increase the GST rates from 18% to 28%. However, that wasn’t the fatal blow.
This time, the tax won’t only apply to Dream11’s commissions and Gross Gaming Revenue (GGR). The Contest Entry Amount (CEA) will be charged with the applicable GST. Or, to put it more simply, the total amount of money that players deposit to use the platform.
How Does This Work?
First off, organizations like Dream11 produce so-called “Real Money Games.” For instance, Dream11 enables people like you and me to fulfill our wildest dreams. A virtual cricket team may be created with the best players from across the globe. Now you gain points if your side performs well by scoring runs or getting wickets. Additionally, if you placed a bet on your team, you might receive a sizable payout. The valuable portion is that.
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The same idea applies to rummy and poker apps as well. The result is not solely dependent on chance. On the other hand, it is unclear what the gambling regulations in India are. The Central Government does not have general legislation. States establish the rules governing these apps. Certain of them have outlawed it. However, the majority of governments have granted these apps a free pass. And the sector has prospered.
In 2022, this real-money gambling market will bring in about 10,000 crores. And everyone is aware that it will continue to grow from here.
So that’s where things stand right now. Simply put, as an illustration, assume that two players join a game. They both put down a deposit of $100. Dream11 collects all of this cash. The pot then increases to $200. However, Dream11 also charges a fee for arranging this transaction. In this case, the pot would be $170 if we assumed a 15% commission (for the sake of brevity, we’re not assuming Google will take a cut when the program is downloaded from the Play Store). Dream11 therefore makes 30. The government then receives a GST of 18% on these profits. This, in this instance, comes to about $5.4.
The GST Council is now calling for a larger cut. It now desires 28%.
It wants to impose a 28% tax on the total pot of money, not just the commissions. Therefore, Dream11 will presumably have to subtract a GST of 56 from a pot of 200 first.
On top of this, a customer’s chance of winning will now be significantly reduced. Once Dream11 deducts its commission, taxes will be applied to the profits. 30% of the net earnings will be withheld by Dream11 at the source and given to the government.
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Hence, it is clear why many refer to it as the “1000% tax”. Not just Dream 11, but everyone working in the online gaming sector is now in danger, including fantasy cricket, rummy, poker, and a long list of other games.
What Are the Second-Order Effects of This?
Illegal apps may be proliferating on the market. The ones who will establish themselves abroad and hack into Indians’ phones. Most of them will be questionable.
Another concern is the possibility that thousands of sector employees will soon learn they are no longer employed. because businesses in the sector could cease operations or scale back.
Then there are the $2.5 billion in foreign investments that these businesses have received. The market will panic. They won’t come close to this industry again. They might even reconsider investing in India. If they are unable to rely on a stable tax system, uncertainty may arise.
Conclusion
So why did the government make this decision?
The straightforward response is that the highest tax rates are often applied to commodities and activities that are deemed “sins,” such as cigarettes or gambling. Therefore, leveling the playing field is important. Yes, you might once more contend that since it’s a game of skill, being a lucky draw is not a problem. But even the apps are aware of how addictive these games are. They have disclaimers stating so because of this. Perhaps for this reason the government wants to lump it in with other ‘sinful’ things as well.
So in September 2022, Gameskraft, a real-money gaming business based in Bengaluru, received a shocking package. It came from the GST division. To the extent that they asserted that Gameskraft owed them enormous taxes totaling 21,000 crores. It appears that the individuals working in the GST offices, squinting over their spreadsheets and papers, had determined that Gameskraft was required to pay 28% on the player deposits it had received.
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Up until that point, Gameskraft paid a cool 18% GST on only the commissions. similar to everyone else in the sector. It wasn’t a gaming enterprise after all; it simply supported “games of skill.” It seemed to strictly adhere to the law. The industry united behind Gameskraft as well.
Gameskraft then filed a lawsuit against the GST department with that assurance.
Finally, a Karnataka High Court judge decided in favor of Gameskraft in May. The judge referred to the GST department’s efforts to raise revenue as “arbitrary,” “vain,” and “illegal.” The video game sector exhaled a sigh of relief. The game’s rules were then modified by the Council. They would compel the gaming corporations to pay.
This terrifying sequence of events for the companies is the result. What this means for the overall gaming sector is still unknown. The proposal still has to be approved for enactment. However, you can bet that the industry will push for a change of heart.
