By Malay K Shukla

The Group of Ministers (GoM) on Casinos, Race Courses and Online Gaming convened for the first meeting earlier in the month to deliberate upon the rate and modality of Goods and Service Tax (GST) to be levied on these industries. Members of the GoM have since stated through various external interactions that there have been advanced discussions on both the key aspects of their recommendation, and it is likely that they will arrive at a consensus when they reconvene next week.

While this is a somewhat vast array of industries, one specific group that has been on tenterhooks is members of the sunrise sector of online skill gaming that offers a set of games such as rummy, poker, chess, fantasy sports, etc, that require a preponderance of skill, and are therefore not betting or gambling.

Online skill gaming is judicially categorised as a legitimate business activity and works on a platform fee model, whereby a fee is charged to facilitate the playing of these skill-based games amongst actual players. This fee ranges 10-20% of the total face value or wager amount, utilised by the platforms to provide a secure and credible gaming ecosystem to these players.
Since the inception of the GST regime, the supply of services made by games of skill conducted online is classifiable under entry 998439, ‘Other online content nowhere else classified’. Under this classification, these platforms have thus far been paying GST at 18% on Gross Gaming Revenue (GGR), or the value of the consideration that these companies charge for providing a platform to players to engage and test their skills against each other.

This has been in line with best practices from across the world; empirical data from mature gaming markets in the West have shown that levying tax between 15-20% on GGR has yielded optimal tax revenue and has ensured the highest degree of compliance by operators—in turn, keeping most gaming businesses within the regulatory framework.

A report by Copenhagen Economics states: ‘We further conclude that the tax-rate should not exceed 20%. The reason being that at higher tax-rates, gaming operators as well as consumers will choose not to join the licensing system.’

The report shows how France, which levies an extremely high tax rate on GGR (of approximately 37% on online poker and 45% on sports betting), achieves a per capita tax revenue of merely 41% of that of the UK, which levies a 15% tax on GGR.
The report showed that as the tax rate increased beyond this range, both the channelling rate (rate of compliance of players, and platforms with legitimate regulatory framework) and tax revenues reduced significantly, thus depriving the government of revenue and players of safe and legal ways of playing games of skill.

Any move to change the base of valuation from GGR to face value or entire wager would primarily be antithetical to the core principle of the Central GST Act that was envisaged with the intent of levying tax only on consideration charged for services rendered, and not the entire amount collected in the pool that always belonged to players.

Practically, such a move is sure to bring the legitimate operators in this industry to a screeching halt. GST on face value would, on paper, translate to an increase of 900% on current taxation, but, in reality, this would only lead to the proliferation of an ‘off the radar’ black market of operators predominantly based offshore, and will thereby reduce tax accruals significantly. Furthermore, players would get exposed to unscrupulous ‘fly by night’ operators who tend to operate in the grey zone and have scant regard for responsible operations, often running manipulated/unfair games of chance under the garb of games of skill.

The detrimental impact of excessive taxation is experienced in every industry, but is likely to get exacerbated further for internet-based operations as the barrier for illegitimate entrants is very low, and setting up a base abroad can offer a sense of immunity as well.

Often, such operations can also facilitate money laundering and similar financial chicanery.

As we approach the GoM meeting, the industry, players, and investors who have trusted the sector with over $2.1 billion in funding over the past few years will be waiting with bated breath, anxious, but also confident of the GoM’s skill and vision in continuing with a taxation framework that has enabled a sunrise sector that has shown tremendous potential in the last decade.

(The writer is Chief Legal and Compliance Officer of Games 24*7. Views expressed are personal and not necessarily that of Financial Express Online.)