₹5,000 cr revenue loss if online gaming gets turnover tax, says study

As India mulls a proposal to levy a 28% tax on the turnover of online skill gaming, a leading law firm cites international best practices in Goods & Services Tax (GST) to suggest the move may be counterproductive. The gaming industry is currently paying 18% GST on its revenues i.e. platform fee intake (known as ‘gross gaming revenue’ or GGR) for providing users a platform to play.

A just-released white paper on ‘international best practices in GST for online gaming’ by law firm Lakshmikumaran & Sridharan (LKS) notes there will be significant revenue loss, expectedly to the tune of over ₹5,000 crore per year if India prefers an onerous taxation regime. It may see users shifting from legitimate online skill gaming platforms to offshore online illegitimate gambling and betting platforms, which are not contributing anything to the country in the form of taxes. 

It may also lead to the infusion of unaccounted black money in the economy, which can be used for illegal activities such as terror financing, money laundering, etc., the white paper says. “Further, a deviation from international best practices will not only vitiate the well-established difference between games of skill and games of chance but also eventually lead to value erosion for more than 500+ Indian start-ups currently valued over $20 billion, which have attracted more than $2.5 billion in investments and FDI,” the paper points out.

According to the report, most countries with a thriving online gaming industry follow the GGR model. It also cites examples of countries where high taxation and incorrect levy on the contest entry amount (CEA) led to revenue loss for the government and encouraged the growth of the unauthorised offshore betting and gambling platforms.

The report highlights important case studies from the UK and France and recommends they must be considered by the GST Council. Earlier, the UK was levying 6.75% on CEA. However, it soon shifted to 15% GST on GGR as the earlier tax model was causing the movement of bookmakers to offshore tax havens, leading to a loss of revenue for the government. The report further noted the shift from turnover tax at the rate of 7% to GGR at 15% in the UK led to new investments and created employment opportunities.

France, one of the largest nations by GDP that has regulated online gaming, was following the model of taxing on CEA. However, in 2020, the French Senate proposed a Budget Bill to amend the tax model from CEA to GGR with respect to the calculation of tax on gaming, as it realised the industry was being unfairly taxed on money that wasn't their revenue, it said.

The report observes India’s proposed increment in tax structure from 18% on GGR to 28% on CEA will increase the tax liability for gaming companies by more than 1,455 % of the current amount, closing the curtains on legitimate operators, and giving rise to a proliferation of illegal offshore operators.

The report comes at a time when the Group of Ministers’ panel on casinos, race courses and online gaming (GoM) is likely to recommend a GST levy of 28% on online gaming, irrespective of whether it is a game of skill or chance, and may leave the final decision on the calculation method to the GST Council. The GoM panel earlier recommended a levy of 28% on CEA for the online gaming industry.