GST on Gaming : does it make any sense?
Imagine that you’re sitting by the beach on a beautiful island in India. Taking a sip of your Martini while watching rays of sunlight dancing elegantly on the blue lagoon infront of you. Its perfect. Looks like the perfect vacation, only that its not a vacation.
I missed a small detail. Turns out, you’re a poker player — one of the shrewdest, sharpest poker players in the whole F******G world. You’re so good you make a living out of playing poker online. You pay a platform fees to the website which connects you to other poker players. If you make a profit, the website deducts 30% TDS and the balance is paid out to you.
You aren’t very happy about the flat 30% TDS deduction, because that impacts your cash flows, but you can claim it while filing your income tax return so it’s not that bad. Practically, your entire cost of operation is the platform fees which you need to recover.
If you make a living out of playing games online — I’ve got some bad news for you. It just got WAY tougher for you to make money playing games.
The GST Council had it’s 50th meeting on 11th July 2023 and they came out with some radical decisions to say the least. Here are some of the major ones:
#1. Reduction of GST rate on food served in cinema halls from 18% to 5%. You can think of eating popcorn while watching a movie now.
#2. Exemption of IGST on import of cancer treating drug — Dinutuximab and Food for Special medical purposes used in the treatment of rare diseases will be exempt from IGST.
#3. 28% GST rate to be levied on the full value of online gaming, horse racing & casinos. And it is this particular decision that has got everybody talking.
What’s the BIG DEAL?
GST rates do fluctuate and industry participants need to be ready for such moves, so what’s the big deal about this rate increase you wonder?
It is the way GST is going to be computed, which has drastically changed. To explain that let’s take an example.
You are playing an online fantasy cricket game and you deposit Rs. 10,000 in your account. The platform fees is 10%. And you get Rs. 15,000 out of the total prize pool — which means you’ve made a profit of Rs. 5,000. What will be your net payout?
A. Pre-outrageous GST implementation
Gross amount = Rs. 15,000
Platform Fees = Rs. 1,500 + 18% GST on such platform fees viz. Rs. 1,770
TDS on gains = 30% of Rs. 5,000 viz. Rs. 1,500
Net payout = Rs. 11,730
So, even though the platform fees bites a lot into your net earnings — the TDS is something that you can claim while filing your income tax returns. Your true winnings would be Rs. 13,230
B. Post-outrageous GST implementation
Gross amount = Rs. 15,000
Platform Fees = Rs. 1,500
GST on full value of deposit = Rs. 10,000 x 28% viz. Rs. 2,800
TDS on gains = Rs. 1,500
Net payout = Rs. 9,200
You can see here that even though you won Rs. 5,000 — you’re down Rs. 800 on your initial investment from a cash flow point of view primarily because of a significant chunk of GST biting into your deposits. The situation would get worse if you lose, because this 28% is going to be charged on the deposit amount, irrespective of whether you win OR lose — the GST department is going to fill up its coffers.
Why it doesn’t make sense?
Talk to any Chartered Accountant, and they’ll tell you that GST is supposed to be charged on the value of goods provided or services rendered. In our case here, for playing online games — the website provides a platform where users can play a game together. For that, it charges a platform fees and charges GST on such platform fees.
Now, that’s something that makes sense. And that’s precisely how GST was being charged before the 50th GST Council meeting happened.
To charge GST on the full face value — that would be absurd. Probably even against the definition of services as per the law.
When you deposit Rs. 10,000 in a wallet on an online gaming website, how can it be inferred that the website is providing you services of Rs. 10,000? Isn’t the value of services limited to the platform fees? [i.e. Rs. 1,500]
And then, shouldn’t GST be charged only on the platform fees and NOT on the full value of the deposit?
Something for the tax authorities to ponder over.
Sure, the Government wants to discourage online gaming and the addiction it brings with it. Increasing the rate of GST is a solid way of making your intent clear about that. But then, you cannot change the very foundation and the way GST is supposed to be calculated.
And shoot a high growth [and profitable] industry in the foot.
Gamers gonna game. Either they’ll shift to a platform which operates outside India or look at ways to play games through illegal sources.
As for casinos — my guess is more black money is going to be generated. Why would anyone want to take a 28% straight cut on their deposit? Gamers and gamblers, are not working for the government!
For the Indian gaming industry as a whole, this will result in lower user engagement and put a hard stop to the tremendous growth rate the industry has seen. It will not be as profitable as it used to be. Some startups will have to shut down their operations completely.
Will be interesting to see how this plays out in the next few quarters. What do you think about this new GST rule?