Game Over? The 28% GST’s Effect on India’s Online Gaming Industry.

Abstract

This blog delves into the problem of heavy taxation on Gaming Industry (i.e. 28% GST on the total deposits in India), the tax was increased from October 1, 2023, it was done by bringing amendments in the GST laws, these amendments are in relation with the Integrated Goods and Services Tax (Amendment) Bill, 2023, and the Central Goods and Services Tax (Amendment) bill, 2023. This move of imposing heavy taxation has resulted in various economic consequences as the gaming industry has suffered a severe loss in their revenues and several companies have even faced stagnation. This new tax policy ignited many new legal debates relating to its constitutional impact on fundamental rights, its classification and differentiation on game involving skill in comparison to chance and luck. The industry has collectively demanded for a revised tax policy and reducing the GST to 18% for skill-based games and better policies for its regulation. The industry had anticipated big hopes from the 2025 union budget, but the matter was not even discussed in the speech made by the Finance Minister Nirmala Sitharaman. Few changes and reforms in this arena is very much needed for a better gaming culture and for the survival and growth of gaming industry in India.

The gaming industry of India has experienced a significant growth in the recent decade as the internet connectivity throughout the country has developed exponentially and also its affordability has contributed a lot for this sector. And also the digitalization of payment through UPI and other means has played role in online gaming and transactions in it. However, the Indian government step of levying 28% GST on total deposits rather then of Gross Gaming Revenue (GGR) has proved to be a burden on the Players of the gaming industry (basically companies operating or participating in this sector).

Also the line which differentiates the games related to skill and games related to chance is very vague and blurry, it act as a crucial factor in determining the legality of the game and whether it could taxed or not. In Dr. K.R. Lakshmanan v. State of Tamil Nadu (1996)[i], the Supreme Court held “that horse racing can be said to be game of skill rather then the game of chance”, so basically it clarified that “games of skill” does not constitute as gambling and is different from games of chance. The court further clarified that the determination whether the game is focused more on skill or chance is determined by the dominant factor in relation to the game and is determined by the ‘test of predominance’ as affirmed in the case of Manoranjithan Manamyil Mandram v. State of Tamil Nadu, (2005)[ii] here the high court of TN determination of nature of the game depends on the ‘question of fact’. However, the autority’s decision to impose taxes on all online gaming despite of clear and established legal distinction provided by the precedents and law between skill and chance in gaming.

The 28% GST And Its Legal Implications

Under this taxation policy through the CGST (Amendment) Act 2023, the online gaming is broadly categorised in the same bracket and no distinction is made between the game based on skill and gambling and betting. This is completely not supportive of the earlier established precedents and laws by the judiciary and legislature. The SC in R.M.D. Chamarbaugwala v. Union of India(1957)[iii], clarified the boundaries between skill based and chance based games through the ‘dominant nature test’ and this ruling is considered as formation of legal framework when governing the nature of games in the country, it is applied to both online and offline games in India. This case also highlights that the games, where success depends more on skill then chance are protected under the Ar. 19(1)(g) of the COI, that guarantees the right of practice of trade or business.

This decision by the 51^st GST Council raised several legal issues

• Imposing same taxation for both skill based and chance based games does not stand in line with the earlier made precedents. And this excessive taxation can also be seen as the infringement of 19(1)(g) and may also fail the test of reasonableness given in Ar. 19(6).
• In India, betting and gambling laws are governed under Public Gambling Act, 1867, and by IT Act 2000 and various other state legislations like The West Bengal Gambling And Price competitions Act, 1957 however it has been seen that the online gaming has always occupied a grey area  as we have seen that  various states such as Tamil Nadu and Andhra Pradesh have come out with their own bans on various apps such as PUBG and even Chess.com was blocked in one the states. The same 28% GST further blurs the distinction and raises the concern of regulatory overreach.
• Across the globe traditionally, gaming has taxes on the Gross Gaming Revenue (GGR) as observed in UK and EU, but this decision by Indian government contradicts global tax practices as it taxes total deposits instead of Gross or Net revenue.

Economy Impact And Industry Challenges

The survey by the All India Gaming Federation (AIGF) and also a report by The report titled “Impact of new GST law on skill-based online games” revealed that the online gaming sector has suffered a lot because of this tax policy, a total of 12 companies of this sector were surveyed and almost 50% reported losses and also over half are experiencing stagnation or decline. This tax policy has also inflicted a fear in the foreign investors and made them rethink their investments and potential investors have turned their backs after this policy.

One major economic concern is that this 28% GST does not take into account the business viability. The SC in Skill Lotto Solutions v. Union of India (2020)[iv], has upheld the imposition of GST on Lotteries, this ruling does not cover the scope of skill based gaming, which has traditionally been classified separately. The government by applying the same taxation and made the distinction more blurry and has increased the financial burdens and the cost of compliance on the platforms which are operating legally. This has also in turn discouraged the possibility of investment and innovation in the sector/industry.

The Industry’s Response and Call for Reform

The industry has very openly challenged the implementation of new tax policy, they have opposed the 28% GST regime, they have urged the authorities and the government for review of the tax policy and were hopeful and anticipatory when it comes to its review in Union Budget 2025, this whole fiasco went unnoticed. Their contention was to not only reconsider and review the 28% tax but also make distinction in  the taxes for the games based on skill and games based on chance or luck. Several key and major gaming industries like Federation Of Indian Fantasy (FIFS) and E-Gaming federation (EGF), have contented for alignment of tax with international standards such as 18% GST on GGR.

Further on the basis of case of K.T. Moopil Nair v. State of Kerala (1961)[v], the principle of uniformity can be adopted and invoked to challenge the standing of this policy under article 14 of COI. In this case the court took back or struck an arbitrary tax law as it was violative of right given in the constitution of equality. The same contention can be used by the gaming industries as taxing both skill based and chance based games the same level or rate of taxes is violative of this principle.

Way Forward

As the issue is so highly popularised, an action has become a need of the time, with the super pressurised contentions from the gaming industries, corporations and investors, the government can be seen left with 3 possible outcomes

• Maintaining the 28% GST

In this case the many corporations may have to close down their business and exit the market. Innovation will suffer a lot and people will be left with very minimal choices.

• Getting back to 18% GST

This will make most people in  the industry happy and make India stand with other global practices and norms when it comes to taxation of gaming. This will also promote sustainable growth in the industry.

• Hybrid taxation model-

This is for different tax model for different games, like in case of skill based 18% and in chance based 28%.

So basically, after studying all the legal and economical consequences, it can be said that the imposition of 28% GST on the total deposits in the online gaming arena has turned out to be a factor of destruction for the gaming and software industries, as it had not only affected their survival but also forced some the of the smaller players to exit the market. It was further observed that the already established legal standing through precedents which had clearly provided a clear distinction between the games based on skill and games based on luck and chance was in a way disregarded and made the distinction kind of blurry for other considerations as according to this tax percentage both the games were charged same level of tax.

The non addressing of this problem in Union Budget of 2025 has further enhanced the tensions of the stakeholders of the industry, as they had high optimism that the government will address this issue in the Full Budget of 2025 and take corrective measures, and will ensure that the regulation of India’s newly growing gaming sector in maintained fairly. The resolution of this legal and economical challenges is the urgent and important need of the Digital industry and will impact the future of online gaming in India.

Author: Parjanya Upadhyay, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

[i] Dr. K.R Lakshmanan v. State Of T.N And Another (1996 INSC 57).

[ii] Manoranjitham Manamyil Mandram vs The State Of Tamil Nadu And Ors. AIR2005MAD261.

[iii] R.M.D. Chamarbaugwala v. Union of India, 1957 AIR 628.

[iv] Skill Lotto Solutions Pvt Ltd. vs Union Of India AIRONLINE 2020 SC 870.

[v] Kunnathat Thathunni Moopil Nair vs The State Of Kerala And Another 1961 AIR 552.