India's regulatory, tax regime stunting e-gaming industry's growth: Report

India's online gaming sector, currently valued at $3.1 billion, can expand to $60 billion by 2034, but the conflation of online skill gaming with games of chance has "stunted" the thriving e-gaming industry's growth, according to the latest USISPF-TMT (the United States India Strategic Partnership Forum (USISPF) and TMT Law Practice) report.

India imposes a 28% goods and services tax (GST) for all formats on the total deposits by players. The report says the practice stands in contrast with global practices that tax, regulate, define and distinguish games of skills from games of chance. "Several countries further carve out fantasy sports as a distinct category within games of skill and regulate and tax them separately."

The report includes the regulatory frameworks and taxation policies in 12 key gaming markets, including the U.S., Germany, the U.K., Denmark, and Belgium. It says the United Nations Central Product Classification (UN CPC), a globally recognised system that forms the basis for taxation in domestic jurisdictions globally, defines online gaming separately from online gambling.

Notably, the US has been a significant contributor to India's gaming sector, with $1.7 billion out of the total $2.5 billion in foreign direct investment (FDI) coming from the US alone. 90% of this FDI is in the pay-to-play segment, 85% of the sector's valuation. With a large consumer base of over 600 million gamers, this space presents a "substantial export opportunity", says the report.

There is a need to distinguish between games of skill and games of chance and to tax the skill-based online gaming sector based on platform fees in line with the global benchmarks. “For Indian companies to compete on a global stage, we need a level playing field with progressive tax and regulatory policies that align with international standards. Our benchmarking of global gaming markets reveals there is a distinct separation between games of skill and games of chance, with skill-based games often receiving conducive treatment,” says Mukesh Aghi, president and CEO, USISPF.

Abhishek Malhotra, partner, TMT Law Practice, says India's current approach to taxing and regulating online gaming under a one-size-fits-all framework poses "significant challenges". "By conflating skill-based games with games of chance, we are stifling innovation. A more nuanced regulatory and taxation regime would foster sustainable growth."

Among the key findings, the report reveals all 12 countries have a separate legal definition for games of chance, ensuring a clear distinction from skill gaming formats. 8 of the 12 countries’ laws or the regulator, also define fantasy sports for distinct regulation and/or taxation. Skill-based games receive unique treatment as a standalone category in all 12 countries, it finds.

The tax rates for skill-based games are generally lower than those for games of chance, it says. Across all nations, skill-based games are taxed on platform fees or gross gaming revenue (GGR), ranging from 2% to 25%. Within skill-based games, fantasy sports are taxed higher than other games of skill owing to the difference in business models and format.

"This is similar to India’s previous GST regime, which taxed online skill gaming at 18% of platform fee, akin to other digital services. France has transitioned from taxing on total pooled amounts to taxing on platform fees to align with international best practices. Additionally, skill-based games do not require permits, licences or whitelisting and are largely unlicenced," says the report.