March 18, 2023; New Delhi: The Online Gaming sector in India is a rapidly growing industry that holds the promise of contributing significantly to India’s goal of becoming a $1 trillion digital economy, generating substantial employment, and fostering innovation. The gaming industry, despite being in its initial stages, has already produced three unicorns and is likely to contribute more to the Indian start-up sector given there are more than 500 gaming studios in the country. A report titled “Online Gaming in India: The Taxation Quandary” by Primus Partners in association with Policy Watch India Foundation gives an overview of the online gaming sector while highlighting the challenges faced by the users and the industry, especially with respect to taxation. The report also highlights that regulation of online gaming will not only open up economic opportunities but also address various social issues.
Nilaya Varma, CEO & Co-Founder, of Primus Partners India said, “A robust and enabling regulatory framework for a dynamic sector like online gaming would ensure a responsible, transparent, and safe environment for all. The online gaming sector holds tremendous potential if it is encouraged with the right regulatory support from the government and a growth-friendly tax regime that keeps the users as well as the industry’s interests in mind.”
The report cites that announcements in Budget 2023-2024 are otherwise positive for the sector as it has addressed the persistent ask to incorporate the offset of losses in the calculation of gains from online games for income tax. While a definition for “Net Winnings” is awaited, the report illustrates an ideal methodology.
It also highlights that over-taxation would gradually lead to attrition of legitimate players, perhaps to illegal offshore gambling apps, reduce revenues for legitimate gaming companies, and in turn result in a loss to the exchequer by way of reduced direct and indirect taxes.
A pertinent issue relating to the implementation mechanism proposed in Budget 2023-24 for TDS (Tax Deducted at Source) on online games has been highlighted in the report. The issue has arisen due to amendments to section 194B under which online gaming is currently covered from 1st April 2023, and the separate provision on online gaming i.e section 194BA coming into force from 1st July 2023, leading to an anomaly. It would be ideal to streamline the applicability of the amendments for “online game” and establish a singular effective date of April 1, 2023. Alternatively, the current tax regime could be continued for the period between April 1, 2023, to June 30, 2023, to eliminate any discrepancies in interpretation. The recurrent developments will also lead to higher costs for the industry resulting in unnecessary expenses that will be difficult to bear for several smaller and mid-size gaming companies, according to the Primus Partners report.
On the GST front, the report cites evidence from countries where the sector has developed to show the GGR (Gross Gaming Revenue) tax model enables the industry to flourish. Levying GST on the total face value would be a departure from established practices, besides making the sector unviable. The recent changes in TDS on income from the prize pool in online gaming without any threshold should be considered by the GST Council.
Online gaming is a rapidly growing industry expected to grow at a CAGR of around 27% over the next five years in India. The sector holds a huge potential to boost India’s GDP and is anticipated to be a significant job generator, with the ability to add more than 1 million jobs by 2030, making a remarkable contribution to India’s growth story.
Adarsh Sharma, Managing Director, Primus Partners India said, “A favourable and conducive environment has been established by the government to facilitate seamless growth of the online gaming industry. The Hon’ble Prime Minister’s emphasis that the global gaming sector possesses enormous potential, and that India must explore to increase its footprint in it, is the government’s reaffirmation and one that would pave the way for a promising and optimistic future.”