Union Budget 2024: Will The Finance Minister Slash The GST On The Gaming Industry?

India's online gaming market has witnessed exponential growth in recent years, projected to rise from $1.6 billion in 2022 to $5 billion by 2025 on the back of an increased smartphone and internet penetration, according to an 'All India Gaming Federation report'. However, the GST rate hike to 28% from October 2023 has significantly impacted this industry, thus hampering the sustainability of startups in this sunrise sector. While this move has certainly put a dent in the profit margins of the industry, it has even led to downsizing and closures in some instances.

As established in Karnataka High Court's judgment in the case of Dream11, games preponderantly involving 'skills' like fantasy sports and electronic sports (esports) ought to be differentiated from pure 'chance' based gambling. However, the blanket 28% GST on all deposits made in gaming apps does not distinguish between these formats, thereby treating 'skill', 'chance', and 'addictive' betting on an equal footing.

Given this, while the technology and innovation-driven e-sports companies have sought a rate rationalization relief / GST review from the government in this year's interim budget, the big question remains as to whether the Hon'ble Finance Minister would accede to such requests.

Protecting genuine skill-based online games while disincentivizing addictive gambling / betting can be considered an optimal approach, but it seems less likely that the 28% taxation would be rolled back at this stage. This is especially considering that the matter is sub-judice before the Apex Court whereby retrospective tax demands by the DGGI have been challenged by major online gaming companies, said Sanjay Chhabria, Director, Indirect Tax and Jinesh Shah Manager of Nexdigm.

In view of the high stakes involved, viz. ~Rs. 1.12 lakh crore (approx.) worth of tax demands against ~71 show cause notices, it would also be prudent to have some regulatory clarity and a more unified approach to the legal proceedings across the country. The government should define the policy on treating tax positions as fraudulent as compared to interpretational differences along with the ensuing implications on penalties to peg the potential of economic growth of this industry, according to Sanjay Chhabria.

In addition to the above, the industry has sought a distinction in taxation of money deposited strictly for wagering versus in-app purchases. Charging differential GST rates on in-app / game purchases separate from bet amounts, can incentivize responsible monetization. Unfortunately, there's been no indication whatsoever on this aspect from the government and hence, the current tax structure could continue, stated Sanjay Chhabria.

The online gaming industry has witnessed an unprecedented expansion. The industry expects the policymakers not to play hard ball on this front thereby creating a win - win situation for all. Ultimately, supporting this sunrise industry's sustainable expansion through strategic taxation alterations can unlock gaming's scintillating promise whilst responsibly regulating the risks, Sanjay Chhabria further added.

Note: The views and opinions stated in the content belong to Sanjay Chhabria, Director, Indirect Tax and Jinesh Shah Manager of Nexdigm.