GST on Online Gaming 

CONTEXT: Online gaming would be taxed at 28% on the full-face value of the placed bets

GAMING INDUSTRY

Data:

• India’s percentage of new paying users (NPUs) in gaming has been the fastest growing in the world for two consecutive years, at 40% in 2020 and reaching 50% in 2021.
• The revenue of the Indian mobile gaming industry is expected to exceed to reach $5 billion in 2025.

Social and economic concerns of online gaming:

• user harms in the nature of addiction-related concerns among children and adults, especially in terms of financial losses incurred by adult users due to such addiction;
• content-related concerns in terms of depiction of violent or inappropriate content, with absence of concrete measures to prevent children from accessing such content or real money games;
• ads of offshore gambling and betting websites targeting Indian users;
• lack of safeguards to secure users’ money and money laundering-related concerns in the absence of any strict KYC mechanism.

Safeguards:

• measures to ensure that such online real money game is not against the interests of sovereignty and integrity of India, security of the State, friendly relations with foreign States and public order;
• safeguards against user harm including self-harm and psychological harm;
• measures to safeguard children through parental controls and age-rating mechanism, and
• measures to safeguard users against the risk of gaming addiction, financial loss and fraud through measures such as repeated warning messages at higher frequency in long gaming sessions and provision to enable a user to exclude himself upon user-defined limits being reached for time or money spent.

Online gaming intermediaries enabling access to online real-money games will have to comply with the following requirements:

• Disclose relevant information to users through terms of service and privacy policy:
  • all the online games offered, with the policy for withdrawal or refund of the deposit made, how the winnings will be decided and distributed, and any other payable charges;
  • the KYC procedure followed before accepting any user deposit in cash or kind;
  • measures taken to protect user deposits; and
  • the framework of the SRB of which the online gaming intermediary is a member
• identify and verify the user identity before accepting any user deposit in cash or kind based on the identification procedure specified for entities regulated by the RBI
• not giving credit or enabling financing by third parties to the users

Other obligations for online gaming intermediaries include—

• Appoint a Chief Compliance Officer, nodal contact person and Resident Grievance Officer. This will ensure accountability of such intermediaries to the law, law enforcement agencies and to the users.
• Publish monthly compliance report on user complaints.
• Publish its physical contact address in India on its website or mobile app. This will enable the government to trace the illegal activities performed by such intermediaries, which was otherwise difficult to do in case of rogue foreign websites/apps.
• Implement an appropriate grievance redressal mechanism.

WAY FORWARD

• Regulatory Clarity: Establish clear and consistent regulations for online gaming to provide certainty and stability to the industry. Define the distinction between games of skill and games of chance to avoid ambiguity and ensure fair treatment for all stakeholders.
• Industry Collaboration: Encourage collaboration between the government, industry players, and relevant stakeholders to develop a comprehensive and balanced regulatory framework that promotes responsible gaming practices while facilitating growth and innovation.
• Responsible Gaming Initiatives: Promote and mandate responsible gaming initiatives, including age verification mechanisms, self-exclusion options, and awareness campaigns to prevent gambling addiction and protect vulnerable users.
• Investor Confidence: Strengthen investor confidence in the online gaming industry by ensuring a stable regulatory environment and addressing concerns related to taxation and compliance. This will encourage more investments and support the growth of innovative gaming platforms.
• Market Research: Conduct comprehensive market research to understand the industry’s dynamics, consumer preferences, and potential areas for growth. This will enable the formulation of targeted policies and strategies to nurture the sector.
• Skill Development: Encourage skill development initiatives in online gaming and related technologies to enhance India’s capabilities in this emerging sector. Support educational programs and training to nurture local talent and attract investments.
• International Best Practices: Study and adopt best practices from other countries where online gaming has been successfully regulated to strike the right balance between growth and consumer protection.
• Public-Private Partnerships: Foster public-private partnerships to leverage the expertise of the private sector while ensuring the government’s oversight in regulating the industry effectively.
• Collaboration with Gaming Associations: Engage with gaming associations and industry bodies to facilitate knowledge sharing, promote self-regulation, and develop industry-wide standards and guidelines.
• Innovation and Technology: Encourage innovation in the online gaming sector, including the use of cutting-edge technologies such as blockchain, artificial intelligence, and virtual reality, to enhance user experiences and ensure fair play.
• Public Awareness Campaigns: Launch public awareness campaigns to educate the public about the legitimacy of online gaming platforms, dispelling myths and misconceptions, and promoting responsible gaming practices.

CONCLUSION

Betting and gambling activities are banned under various State laws, while few games of skill have been held to be constitutionally valid by the Supreme Court in various judgements. In this legal landscape, the online gaming industry in India has seen immense growth in the recent past.

a balanced approach to taxation and regulation is essential to foster a thriving and responsible online gaming industry in India. The government could consider the unique nature of online gaming platforms and adopt measures that encourage growth while ensuring consumer protection and responsible gaming practices. By addressing these concerns, India can pave the way for a vibrant online gaming sector that contributes to economic growth and provides a safe and enjoyable gaming experience for its users.