Introduction:
The world of online games and esports has exploded in the last decade, and the Covid 19 has strengthened the digital industry in terms of everything. Online games not only provide a pleasant diversion for people during the lockdown, but they also offer monetary and non-monetary prizes for winners.
In the digital age, online gaming is the fourth biggest sub-sector. According to the surveys, the number of online gamers is expected to increase from 360 million in 2020 to 510 million in 2022[1].
The gaming industry is a substantial source of tax income due to its economic importance.
The growth of India’s gaming sector has attracted large investments in organizations that provide these services. While gamers like rummy, poker, sports games, quizzes, and other similar games for the thrill, businesses see it as a lucrative opportunity.
According to EY(Ernst and Young) India and the All India Gaming Federation, India has a thriving online gaming business valued “only” around a billion dollars but growing at a rate of 22% each year (AIGF)[2]. The country’s tech-savvy youth have benefited from ubiquitous low-cost smartphones and internet plans.
Online gaming and Esports
Electronic games played over a computer network, notably the Internet, are known as online gaming. Electronic game worlds have made billions of dollars from millions of gamers fighting, purchasing, crafting and selling in a variety of online scenarios.[3]
Online games and gaming have evolved in terms of aesthetics, gameplay, and storyline as a result of technological improvements. Real money games (RMG), mobile-centric/casual games and e-sports are the three main types of online gaming. Rummy, poker, daily fantasy sports, and quizzing are some of the subcategories within the RMG genre. There are online games for a variety of genres, including first-person shooters, strategy games, sports, and massively multiplayer online role-playing games (MMORPG). All modern gaming platforms, such as mobile devices, handheld PCs, consoles, and PCs, support online play.
Esports is a form of competitive gaming. It consists of professional teams of people contending in games against each other and winning large sums of money as rewards regularly. Esports athletes, like football or basketball players, are contracted to play for a range of different organizations. These teams practice and compete in their respective sports in the same way that a footballer or other athlete would in traditional physical sports.
The Indian esports business has changed dramatically in recent years. It reached its apex with the advancement or establishment of companies like Alibaba, Nodwin Gaming, JetSyntheses, and Nazara, which have already invested a significant amount of money in this sector due to the burgeoning expansion of disposable incomes, as well as the ease of access to smartphones and the internet. Competitive gaming at a professional standard is referred to as esports, and the finest esports players are frequently the best in the world at their individual games. Competitive gaming isn’t a new notion by any means, but having professional video game players similarly compete for a living to traditional sports is, at least in the Western world.
Taxation in Online Gaming and ESports
The Income Tax Act of 1961 specifies that wins from various games are taxed at a specific rate of 30%. The games that are taxable at this particular rate, on the other hand, are solely in the nature of a game of chance or luck. Winnings from other games requiring the application of skills and expertise will be taxed at standard rates. The main problem now is whether or not the game requires the user’s competence. Under section 115BB[4] (It is essential to analyze the GST consequences and obstructions that may affect the industry’s overall business operations. It is also worthwhile to assess worldwide best practices for industry taxation and provide much-needed clarification on valuation and the applicable GST rate.), any earnings from a game of chance are taxed at a reduced rate. Lottery or crossword puzzle winnings, horse race winnings, card game winnings, and any other similar game would be taxed at a fixed rate of 30%. In the instance of victories from a skill game, the taxable income would be assessed under the heading “income from other sources” and taxed at the standard tax rate in the assessee’s hands.
One of the most debated subjects of online gaming in India is its Legality, stating that numerous higher courts throughout the country have ruled that Rummy, Poker, and Fantasy Sports games are games of skill, not games of chance. By using the criteria established by the courts, e-sports must also qualify as a game of skill.
Gaming networks must pay GST because they are considered vendors. Typically, the registration cost is paid in an escrow account. A percentage of the fee (say 10%) is passed to the web host as a ‘platform charge.’ The prize pool is made up of the remaining 90% of the fee paid (actionable claim) and is transferred to a winner’s dashboard.
In 1996, the Supreme Court of India issued the K.R. Lakshmanan[5] ruling, which established a guiding idea to control the conduct of online gaming/gambling. Those in which chance triumphs over skill are prohibited, whereas games in which skill triumphs over chance are tolerated. The Supreme Court of India has made rummy legal in India by pronouncing the game to be legitimate. Earnings from online gaming, on the other hand, are subject to income tax. Card games and other games of any kind, according to the Finance Act of 2001, include a game show, a television or computer entertainment program in which participants compete for prizes, and other comparable programs.
In reality, when compared to other online games, courts have been more aggressive in creating a space for fantasy sports. Both the Punjab and Haryana High Courts and the Bombay High Court have determined that the games offered by Dream 11 (Fantasy Cricket, Kabaddi, and Football, among others) require skill, knowledge, judgment, and attention and are thus not regarded to fall within the definition of internet gambling.
Increase in the taxation of Gaming and Esports
The Esports and Online gaming industry has been hampered by valuation conflicts under GST law. It is critical to emphasize that regressive taxes of these rising sectors may only make the business in India unsustainable. The sector is still in its infancy, and the government’s failure to categorize online games as games of skill has led to ambiguity. Inconsistencies in state legislation about the scope of online gaming and ESports, as well as the prohibition of even rummy games in some areas, have added to the ambiguity.
The lack of defined valuation rules, as well as ambiguities in levying GST on the full stake value as opposed to the rake fee aspect, has produced regulatory confusion among industry stakeholders, dampening the business to some extent. The ambiguity has the potential to generate extraneous tax demands in addition to the rake(net) charge generated by online gaming providers. Such aggressive action would have a substantial influence on the long-term viability of the online gaming industry.
All awards or victories from such games do not have to be monetary. Some rewards may consist of both moveable and immovable assets, which are termed as Kinds. Before claiming such rewards, a TDS of 30.9 percent must be paid to the government. In the case of winnings from such online games, If the prize value exceeds INR 10,000, all income derived will be taxed at a flat 30% rate under section 194B. The 4% Secondary and Higher Education Cess will be added to the tax amount, resulting in a 31.2 percent effective rate of tax. If the prize is worth more than INR 10 lakhs, an additional 10% surcharge will be applied. If, on the other hand, the award is partly in cash and partly in kind, tax is deducted on the entire worth of the cash and kind. If the cash is inadequate to cover the TDS duty, the deficit is paid by either the winner or the prize distributor. This is entirely dependent on the reward scheme’s terms and conditions.
Traditional online gaming markets, such as the United States, the United Kingdom, and the majority of European countries, levy taxes based on the rake fee (net platform gain).
According to industry and accounting, indirect taxation of more than 20% renders any such company unsustainable, given the high player payout ratios for the most recognized platforms. Whatever strategy is taken, a more realistic and flexible taxation policy should take pay-in and payout ratios, bonuses, and other pertinent factors into account. Failure to do so risks suffocating a dynamic digital industry with enormous promise for the Union.
While gamers are concerned about their gaming income tax, public officials must examine the monetary and social impact that the gaming sector has on the digital economy. Overflow effects range from (foreign) investment to showcase progress and be reallocated for social welfare initiatives within the presence of 400 game studios and many positions.
Conclusion
Experts believe that a reasonable GST system for the gaming industry – and other related tech fields – maybe somewhere in the middle, around 18 percent. It is essential to analyze the GST consequences and obstructions that may affect the industry’s overall business operations. It is also worthwhile to assess worldwide best practices for industry taxation and provide much-needed clarification on valuation and the applicable GST rate.
References:
[1] Poonam Mandal, Online gaming will continue to grow and reach over 500 million gamers by 2022: FICCI EY Report, GAMES (Oct. 22, 2021, 12:41 PM) https://www.animationxpress.com/games/online-gaming-will-continue-to-grow-and-reach-over-500-million-gamers-by-2022-ficci-ey-report/.
[2] Roland Landers, India’s Online Gaming sector asks for Flexible taxation, Hopes for Imminent GSt Review, NEWS (Oct. 22, 2021, 12:04 PM) https://www.aigf.in/game/indias-online-gaming-sector-asks-for-flexible-taxation-hopes-for-imminent-gst-review/.
[3] Michael Ray, Online Gaming, BRITANNICA (Oct. 17, 2021, 1:03 PM) https://www.britannica.com/technology/online-gaming.
[4] The Income Tax Act, 1961, No. 12, Acts of Parliament, 1961 (India).
[5] Dr. K.R. Lakshmanan v. State of Tamil Nadu & Anr. [1996] INSC 61 (India).
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