No cheat-code for online gaming industry as tax dept turns up the heat

The Ministry of Information and Broadcasting on Tuesday issued a new advisory requesting television and digital media platforms to not play ads for online betting sites. The All India Gaming Federation welcomed the new diktat. The call for stricter centralised regulations in the online gaming sector has grown in the recent days, especially after the income tax (I-T) department recently issued show-cause notices to seven online game companies, as part of an investigation into possible tax evasion by such institutions.

Simultaneously, with the rapid spread of smartphones with immersive graphics to tier-2 and tier-3 cities, favourable demographics and affordable data services, online gaming is proving to be one of the fastest growing sectors in the entertainment space. Here’s a look at the major developments on this front.

Income Tax:

• Preliminary estimates by the Central Board of Direct Taxes (CBDT) indicate nearly Rs 28,000 crore of tax evasions
• The CBDT found in February that the participants of an Indian gaming company have won Rs 58,000 crore over the past 3 years — FYs 2019-20, 2020-21 and 2021-22.
• At the rate of 30 per cent plus penalties, the winners have to pay about Rs 20,000 crore
• The gaming portal has 8 million registered players, including students and young IT professionals based in Bengaluru, Pune, and Gurgaon, according to the I-T department.
• CBDT working on detailed guidelines for taxability of the online gaming sector
• Gross winnings face a flat 30 per cent tax
• Portals to deduct tax at source at the rate of 0. 1 per cent for winnings of over Rs 10,000.
• Winnings from gaming, betting, lottery, etc are governed under sections 155BB and 194B (the latter for TDS) of the Income Tax Act.

GST issues for online gaming

• In July, 2022, the Group of Ministers (GoM) reviewing GST decided to increased GST rates from 18 per cent to 28 per cent
• GoM also decided not to club all gaming with gambling, and horse racing.
• This is in addition to the 30 per cent income tax customers pay on winnings.
• GST on the gross gaming value (GVV) being considered.
• The DGCI is set to issue more such notices to multiple online gaming companies and recover more than Rs 2.5 trillion in GST.
• Debate on classification of what is “game of skill” (18 per cent GST) vs “game of chance” (28 per cent GST)

States that have banned online games that involve money: Odisha, Nagaland, Tamil Nadu, Andhra Pradesh, Telangana, and Kerala. Earlier this year, the Karnataka High Court stayed a similar move by the state’s government. In separate verdicts, High Courts of Rajasthan, Punjab, Haryana, and Mumbai have recognised fantasy sports as games of skill and a legitimate business activity.

According to the All India Gaming Federation at present the gaming industry has created 40,000–50,000 jobs directly and in the next 5 years the industry is expected to employ around 200,000 people

The Indian online gaming industry pays GST of over Rs 2,200 crore, according to a recent study by EY and Assocham

According to a KPMG report dated 2022, Currently, there are more than 400 gaming companies in India

According to the Redseer report, the share of new paying users in gaming grew from 40 per cent in FY20 to 50 per cent FY21, as the ease in monetisation meant more gamers were willing to pay for their gaming experience.