Gameskraft GST notice a blow for India’s skill-based industry

The recent $262 million show-cause notice issued by India’s tax authorities to Gameskraft Technology has demoralised the country’s gaming industry, as it appears to fail to make a distinction between games of skill and games of chance. 

The Bengaluru-based company was accused of failing to pay GST totaling Rs 21,000 crore between 2017 and June 30, 2022. It is the largest indirect tax show-cause notice issued in India. 

The Directorate General of GST Intelligence (DGGI) appears to be combining betting and gambling, with online games of skill, which are protected by the Indian constitution, writes igaming consultant Jaydeep Chakravartty.

 Founded in 2017, Gameskraft offers real-money online and mobile Rummy Culture, Gamezy, and Rummy Time games where players can place bets. 

The DGGI alleged that Rs 77,000 crore of bet amounts placed between 2017 and June 30, 2022 were subject to a 28 percent tax.  The gaming company was encouraging online betting through its card, casual, and fantasy game services, the DGGI alleged.

This show-case notice was a blow to India’s thriving online gaming industry. A high-level inter-ministerial task force report has estimated that  “the revenue of the Indian mobile gaming industry is expected to exceed $1.5 billion in 2022, and is estimated to reach $5 billion in 2025. 

Banning skill games no solution

Skill-based gaming cannot be compared with gambling, and banning is not a solution. It would negatively affect the online gaming market, which over the past five years has grown at a CAGR of over 25 percent. 

Online skill-based gaming has allowed people to stay in touch with friends and peers while they’ve been confined to their homes during COVID-19. This has resulted in 1.5x growth for the sector year-on-year. Over 350 million people play online games in India now, with a substantial portion of them coming from the South of India. 

The show-cause notice also revives questions on the taxation of Indian online gaming companies.  

A Group of Ministers (GoM) was established by the federal Finance Ministry in May to make suggestions for an equal and fair GST framework for all types of gaming. 

We expect review will be reasonable and help to promote the sector while also boosting tax collections. The GoM had earlier recommended a levy of 28 percent on gross gaming revenue, but it had asked for more time to make its final recommendations to the GST Council. 

Flat rate to cause industry harm

The GoM is also mulling the method of valuation of supply for GST on online gaming. 

Currently, games of skill (that involve no betting) and games of chance are taxed differently. Applying a flat tax rate will cause many gaming enterprises to close in India.  

According to current legislation, the government is not permitted to outrightly prohibit skill-based games, but it may regulate them. Instead, the government should take action against illegal/underground gambling sites, which are taking customer money without paying taxes.  

The global fantasy gaming industry is expected to touch $38.6 billion by 2025, according to an estimate based on the current growth trends.

Another setback for the industry has been the Tamil Nadu government’s ban on online gambling and playing of online games of skill, like rummy and poker, with money or other stakes. It prohibits advertisements that directly or indirectly encourage, or persuade people to engage in online gambling, and those who violate it face up to a year in prison, a fine of up to Rs. 5 lakh, or both. 

Tamil Nadu ban triggers challenge

The Tamil Nadu cabinet’s approval of a law seeking a ban on online gaming has drawn flak from members of  the All India Gaming Federation, or AIGF, while the E-gaming Federation (EGF) is set to challenge the recent ordinance.  

A thorough online gaming policy that safeguards players, guarantees that only legal online skill-gaming operators provide their services, and weeds out those who flout the law is urgently needed. 

The sector has great potential for economic growth and employment.

The central government established an inter-ministerial task force and the Ministry of Electronics and Information Technology held consultations with all stakeholders on regulating the online gaming industry in order to maximise the potential of the sunrise sector. 

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