‘Online gaming in India – The GST conundrum’ report provides clarity on the valuation and applicable GST rates for the gaming industry

The exponential rise of the gaming industry in 2020 has bound every sector to explore the gaming industry with new links like investment, sponsors, and more. In today’s digital lifestyle, the avenues for seeking recreation and entertainment have increased manifold. Resultantly, online gaming has emerged as an important avenue due to a multitude of favourable factors such as young and tech-savvy population, affordable availability of feature-packed smartphones, better internet connectivity, increased awareness and development of local gaming content suited to one’s preferences. The Indian online gaming sector reached $1.027 billion in 2020, a growth of approximately 17.3 per cent from $543 million in 2016. With its current trajectory, it is expected to reach $2 billion by 2023 in terms of rake fees earned, as per the EY- All India Gaming Federation (AIGF) report ‘Online gaming in India – The GST conundrum.’

EY India partner – indirect tax Bipin Sapra said, “The online gaming industry is growing at an impressive CAGR of over 20 per cent and holds significant potential for economic growth, job creation and contribution to the Government’s vision of a trillion dollar digital economy by 2025. To enable the industry in realising its peak growth potential, it is imperative that the GST regime for online gaming industry is kept rational and at par with other technology platforms. Adopting globally consistent standards in our tax treatment of the industry will enable it to achieve its true potential.” 

All India Gaming Federation CEO Roland Landers said, “The valuation disputes under GST law have been a dampener to the industry. Considering the market size and future growth projections, the online gaming industry is expected to be a significant contributor to the government’s vision and provide future economic avenues considering the ubiquitous digital trends impacting our lifestyle. It is important to highlight that regressive taxation of these emerging sectors may only make the business unsustainable in India. Our recommendation is that the Tax authorities should align its policies with internationally accepted principles of taxing the online gaming sector and provide certainty to the industry. We hope that this report would provide meaningful insights and help accord focus to this sunrise industry.” 

Here are the key findings:

  • The global market size for online games is expected to grow from $37.65 billion in 2019 to $122.05 billion in 2025. This translates to a CAGR of 18 per cent (approx).
  • The industry is the fourth largest sub-sector in Media and Entertainment in 2020 with a CAGR of 27 per cent.
  • Online gamers are estimated to grow from 360 million (2020) to 510 million (2022). Of these, an estimated 85 per cent are mobile gamers. 
  • Online real money game players are expected to grow from 80 million in 2020 to 150 million by 2023.
  • The country has over 400 gaming start-ups in India. 
  • Favorable demographics – millions of young consumers with increasing levels of disposable income – are making consumer contribution the largest revenue stream. By creating over 11,000 jobs, esports segment is estimated to generate around Rs 100 billion of economic value for India between 2021 and 2025, comprising investments, in-app purchases, winnings. 
  • The growth prospects of the industry have been fueled by gaming platforms Dream11, MPL, Baazi Group, Rummy Culture, Paytm First Games, Zupee, Adda52, Sugal & Damani group, Spartan. Casual gaming platforms and developers include – Ludo King, Ludo Supreme, 99games, Moonfrog Labs. Esports publishers include – Krafton, Electronic Arts, Nintendo, Epic Games, Nazara.  Esports platforms includes MPL esports, Nodwin, PayTM First Games.
  • GST rate of 18 per cent to be levied to mitigate any risks of misclassification of the online gaming industry as betting or gambling. The tax rate should not exceed 20 per cent as it could result in the gaming operators as well as consumers entering the grey market. 

As per the report, the game of chance attracts a higher GST rate of tax vis-à-vis a game of skill. Online games operate either on the ‘rake fee’ model wherein the gaming platform charges a rake fee for facilitating games or ‘freemium’ models wherein the gameplay is free but additional features may require users to purchase specific items for a monetary price. A rational imposition of Goods and Services Tax (‘GST’) is therefore vital for sustaining this industry.

The report also rolled out the entire classification of gaming, esports, fantasy sports and real money gaming and so on to avoid confusion between the categories. To realise the full potential of the online gaming industry, a levy of standard GST/VAT rates is recommended, to be treated on par with any other segments of the economy. 

Considering the market size and future growth projections, the online gaming industry is expected to be a significant contributor to the economy. It may help achieve the vision of a Trillion-Dollar digital economy of the government of India and provide future economic avenues considering the ubiquitous digital trends impacting our lifestyle. Given the potential and the economic contribution, it is important to iron out the ambiguities and provide a stable tax regime at a time when the industry is nascent and only about to grow from here. With this view, the policy recommendations have been provided herein.


Crystallizing the GST levy mechanism

The valuation mechanism in levying GST on the entire stake value vis-à-vis the rake fee element should be clearly outlined to avoid any ambiguities and potential litigations leading to tax demands. Any uncertainty and possibilities of litigation adversely impacts the business plans, operations, and entry of new players in the industry. Most industry players have a rake fee in the range of four per cent to 20per cent. Any attempt to levy GST on the entire stake value potentially leads to economic unviability of the business model and could force the closure of businesses. 

The report outlines three options:

  • GST on rake fee value: This suggests a levy of GST only on the rake fee i.e. consideration received by the gaming platform. It is presently being followed across the industry and is in alignment with existing GST mechanism to levy tax on consideration only.
  • Deemed credit model: This has only two data metrics to be considered – stake and pay-outs. This mechanism makes it easier for the Government to verify and audit entities. However, businesses would be required to undertake a change in their ERP systems to compute GST.
  1.  
  • GST on entire stake value but at a nominal rate of say 1.8 per cent: This is simpler to calculate as it has only one data metric to be tracked by business i.e. stake value. However, the mechanism would be discriminatory for industry players having low rake since GST outflow would be high whereas margins are lower. This method is also prone to manipulation where ‘platform fee only’ players without any prize-winning model may offer nominal winnings to lower tax outflow.

While India is currently the fourth largest online gaming market globally, the industry requires a robust regulatory and legal environment to help the business scale quickly and achieve its true potential. Therefore, the EY in collaboration with All India Gaming Federation (AIGF), launched this report – ‘Online gaming in India – The GST conundrum,’ to provide clarity on valuation of applicable GST.

Games