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Deloitte Warns Of Disaster If India Tax Rate Targets Online Volume

July 10, 2023
A Deloitte analysis released on the eve of a major goods and services tax (GST) determination for the Indian online gaming industry has warned a maximum tax on gaming volume will trigger industry “degrowth” and cripple large and small operators.

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A Deloitte analysis released on the eve of a major goods and services tax (GST) determination for the Indian online gaming industry has warned a maximum tax on gaming volume will trigger industry “degrowth” and cripple large and small operators.

The July analysis, co-authored with the Federation of Indian Fantasy Sports (FIFS), concluded that application of a 28 percent GST to customer “contest entry amount” (gaming volume) “may result in a degrowth of the industry and parallel reduction of GST revenue collection”.

“Degrowth of the industry may also result in significant job losses and reduced investments, making small industry players (e.g. gaming start-ups) unviable,” it said.

The central government’s GST Council is scheduled to meet on Tuesday (July 11) to decide on numerous GST items, including for all gaming segments, whose tax revisions have been delayed by disagreement among the council’s state government delegates.

The Deloitte report argues that a 28 percent GST on volume, rather than the current 18 percent GST on gross revenue, would shift consumer interest to foreign-based gaming platforms, which are illegal to use.

It added that this worst-case scenario would strip the industry of its start-ups, rendering them “unviable, leading to job losses”.

Applying a “28 percent GST on [volume] may result in a reduction of industry revenue by about 43 times in year five [of the tax scheme’s introduction], when the incidence of increased cost on account of increased tax is completely passed on to customers”, the report said.

The report notes that online gaming operators’ current revenue is less than what such a tax liability would impose, “making it impossible for all [operators] to even reach the break-even point”.

“Therefore, the industry will become unviable, resulting in both the small as well as the large players exiting the market.

“Further, this will also gradually shift consumers to offshore/grey market online gaming industries. Even the revenue exchequer for the government will also reduce.”

Non-catastrophic scenarios, such as online operators passing on the bulk of GST increases to the customer or a full 28 percent GST applying only to gross revenue, would still result in considerable damage to the industry, the Deloitte report said.

Even if a 28 percent GST is applied to gross revenue and not volume, the report’s authors predict reduced profit margins and lower user retention.

“The Indian online gaming industry is at a nascent stage of growth and development. A higher tax rate may prevent the industry from reaching its full potential and thereby curtailing investments and job creation,” the report said.

The GST Council’s determination on Tuesday would come as the central government prepares an appeal against a key Karnataka High Court ruling on GST collection from online gaming companies.

The court found that because the central government cannot categorise online skill games as gambling activity, it may not tax them by the same standard.

Consequently, the court rejected the government’s claim for $2.6bn in unpaid taxes from Gameskraft Technologies.

The Deloitte report added that the “applicability of GST” should rest on the distinction between constitutionally protected online games of skill and non-protected games of chance.

“A thoughtful approach to taxation, taking into account industry dynamics, consumer affordability, substitutability, and competitiveness, can help maintain a sustainable and thriving gaming ecosystem,” it said.

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