Date: 15/10/2022

Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Key Phrases: Online Gaming Industry in India, Market share of Online Gaming, Taxation in Online gaming, Repercussions of overtaxing, Government policies to regulate online gaming.

Context:

• As of 2022 India’s online gaming industry is entertaining over 200 million people, generating over $2 billion in revenues and being worth over $20 billion.
• By 2030, Indian online gaming companies could be generating over $25 billion in revenues and offering India’s most dominant form of entertainment after cricket.

How to boost the Gaming Industry?

• To make a $25 billion industry the gaming industry needs the right entrepreneurial spirit
• It needs to be supported through the right policy framework that gives operators-
  • An opportunity to innovate
  • Protects users from operator and self-abuse
  • Maximizes tax revenues without hurting the industry’s growth and innovation.

What is the tax rate in the online gaming sector?

• The online gaming industry pays 18% GST on its revenues or platform fee intake (known as ‘gross gaming revenue’ or GGR) for providing users a platform to play.
• This fee happens to be roughly 15% of the overall prize pool in any contest.
• It means GST is about 2.7% of the overall prize pool and if 28% GST is levied on the overall prize pool as suggested by some policymakers ,it would result in a 1,000% increase in the effective tax burden.

Repercussions of over taxation

• The proposed high tax policy will make it impossible for the sunrise sector to achieve the vision of India becoming a gaming superpower and becoming a contributor to a trillion-dollar digital economy.
• It would also open the floodgates for (offshore) grey market operators that will be able to offer much bigger prize pools than tax-compliant domestic operators.
  • They will be forced to pass on higher taxes to users.
• Such repercussions have already been seen in horse racing, where the imposition of 28% GST on prize pools reduced industry revenues by over 60% and tax collections by over a third.
• In the digital age there are no territorial boundaries and this over taxation may lead to shutting off domestic operators and shifting of foreign operators to other markets.
  • It would potentially wipe out the industry overnight.
  • Tens of thousands would be jobless.
  • Thousands of crore in tax revenue lost
  • Millions of gullible users falling prey to grey-market operators.

Why the high tax rates?

• Some policymakers believe that games of skill are required to pay GST on the entire entry-fee pool instead of just their commission or GGR.
  • This is not in line with the tax law which states that the total pool is taxable only if the underlying activity is deemed to be “betting and gambling”.
• The Supreme Court and high court judgements have established that games of skill do not constitute gambling and are no different from games of skill played offline.
  • These rulings held that states do not have the right to regulate online games of skill under their powers to regulate “betting and gambling” under entry 34 of the Constitution.
  • Because such games enjoy constitutional protection.

What is the response of government and policy makers?

• The Union government has been working to regulate games of skill by creating an inter-ministerial task force and holding exhaustive consultations with the industry.
• Recently the Ministry of Information and Broadcasting (MIB) issued advisories to broadcasters and websites to refrain from online betting.
  • It is a positive step towards distinguishing games of skill and chance.
• Some sections of the government and policymakers see real money gaming as a vice and want to shut it down.
  • They propose higher taxes or complete shutdown, in both cases pushing for crushing the industry.
• Consumer protection in real-money gaming is must but there is evidence which shows that online games increase social ills is exaggerated.
  • Independent entities like the Rotary Club and several prominent psychologists have held the same.

Way forward

• Shutting down the local industry is not going to protect consumers.
• Over the years it has been established in various sectors that penalizing through taxes only ends up shifting consumption in favour of non-compliant illicit operators.
  • It does not disincentives users, and therefore becomes a self-defeating exercise.
• India should avoid such strict regulations of these games as it will increase only the difficulties of the authorities likewise the USA and the UK.
• Alternatively India should leapfrog to the world’s best-in-class standards to protect consumers.

Conclusion

• An industry-friendly, progressive policy with consumer protection at the forefront will accelerate healthy growth for the online gaming sector.
• It will bring in incremental tax revenues, which could make India a global online gaming powerhouse in return.

Source: Live-Mint

Mains Question:

Q. “We should favor innovation over regulation”, in light of the statement, discuss the online gaming Industry, its challenges and impact on the economy. Also do suggest measures to overcome challenges and a smoother regulation of the online gaming industry. (250 words).