How new taxes can kill online gaming industry

TK Arun

Senior Journalist

BEING young, bright, enterprising and hardworking often lands you in a startup. Official pronouncements on StartUp India, Skill India, Aspirational India, etc., give young denizens of the startup world the impression that the system supports them, that their job is to create something where nothing existed, of converting a dream into a functional reality that offers people jobs and self-respect, produces new value and adds to the India story. Then they wake up to the grubby reality in which prodding pins burst their balloons of faith and hope, and these pins are wielded by the very system they thought was built to support them.

The so-called angel tax is a prime example of the official fear of people getting away with wrongdoing, smothering the urge to do right. If a startup receives funding at a valuation that the government deems excessive, it will tax the excess at the corporate income tax rate. What motivates the government is the desire to check money-laundering, in which new companies are used as vehicles for storing ill-gotten gains, before taking the money out as startup expenses on assorted activities. What it ends up doing is to hold startups, their capital and their investors hostage to that spectre India is supposed to have buried: the Inspector Raj.

More vicious is the example of the new regime of taxing online real-money gaming. This burgeoning business — a revenue-generating segment of online gaming with the potential to develop a variety of online games that involve chance and games that rely entirely on skills — is currently being choked to death by the government.

There is a popular view —entertained by genteel folk who turn their noses up at games that do not risk concussion on the playing field — that games played on computers, phones and consoles are an indulgence that western societies can afford, but sit ill with India’s aspiring minds, who should, instead of wasting time on fiddly gadgets, strive and become doctors, engineers, managers, and respected NRIs, if not soldiers and civil servants, or, worse comes to worst, traders. They fail to appreciate that online games are a $200-billion global business, four to five times as large as movies, generating not just big money but also innovations in hardware, software and graphics. South Korea and Japan have soft power way beyond their economic or military size because of their manga, anime, games, music and movies. Games spill over into mega tournaments of e-sports, virtual reality and even provide the stage for musical concerts that take place against backgrounds created by game engines.

India has cultural resources that can spawn myriad games, which can conquer the world. Artificial intelligence will be able to scale the language barrier. Superfast communications would enable global distribution. A gaming industry would generate millions of jobs in the fields of creative arts, technology and marketing. There is a lot riding on India nurturing its online gaming industry.

Real money games are a subset of online games, which already generate more than Rs 2,000 crore of GST. Now, the government is poised to kill the industry with its taxation policy.

When a player enters an online game of, say, Rummy, he pays what is called, in the jargon, the contest entry amount, the CEA. This has two parts — a small fee that is charged by the gaming company for organising the game, typically 10 per cent, and the stake, which is pooled with the stakes of other players to constitute the prize money. The fee charged by the gaming companies is their revenue and is called the Gross Gaming Revenue.

The prize money is handed over to the winner once the game is over, after deducting income tax at the highest marginal rate. Till the GST Council, in its wisdom, decided to levy a 28 per cent tax on the entire amount that the player pays at the outset, that is, the CEA, gaming companies used to pay GST on the money that accrued to them, that is, the GGR. Now, GST is to be applied on the GGR and on the stake at the outset, and once the game is over, income tax at the highest marginal rate would be levied on the winnings, before the winner gets the money.

Earlier, if someone enters the game paying Rs 100 and plays with three others, the GGR would be Rs 40, and Rs 360 would be the stake. GST would be levied on Rs 40, and income tax on

Rs 360. In the new regime, GST would be levied on the entire Rs 100, and while the gaming company would continue to bear the burden of GST on Rs 40, it would deduct the GST of 28 per cent from the stake, reducing the stake to Rs 259. The post-tax take from the game would be Rs 161, down from Rs 241. As a proportion of the entry amount of Rs 100, the winning from a game would come down from 2.41 times the contest entry amount to 1.61 times the contest entry amount, down one-third.

Foreign gaming companies have now become all the more attractive. While banned in India, they can be accessed using a virtual private network, or VPN. Most of India’s smaller gaming companies will find it difficult to sustain.

While the decision to tax the stake as well as the gaming company fee has already endangered the sector, the tax department has sent the gaming companies notices seeking back taxes, cumulatively expected to be at least Rs 1,00,000 crore. The gaming companies’ collective revenue is estimated to be somewhere below

Rs 14,000 crore. By seeking back taxes that had not been approved of or legislated to the tune of multiples of industry revenue, the tax demand could throttle the industry to death.

Startup India, indeed!