Controversial 28% GST on Online Gaming Becomes Government's Need of the Hour

The decision to hike the goods and services tax (GST) rate on online gaming and casinos from 18 per cent to 28 per cent, announced in August 2023, was met with significant concern from the gaming industry, with some experts even labelling it an “industry killer.” However, since its levy in October 2023, it has proven to be a necessity for the Centre.

Days before the 54^th GST Council meeting, a highly placed official in the Ministry of Finance said that the average GST rate is currently on a declining trend, which means lesser revenue for the government. “The rate that was there last year has declined further, which is currently a problem that we are trying to navigate,” the official said.

Union Finance Minister Nirmala Sitharaman, at a recent event organised by the Revenue Bar Association in Chennai, informed that the average GST rate dropped to 12.2 percent in 2023, significantly below the revenue neutral rate (RNR) of 15.3 percent.

The revenue neutral rate (RNR) is the tax rate at which the government would collect the same amount of revenue despite changes in tax laws. This means that the reduced burden on taxpayers under the GST regime has translated into a reduction in income of the central government, necessitating a rationalisation of tax rates to correct the shortfall.

Yet, despite the government's intention to address this issue, officials say that the process is unlikely to proceed swiftly due to various sensitivities involved. “It is challenging to create a rationalisation that satisfies everyone because some rates will inevitably increase,” says Sanjay Malhotra, Revenue Secretary.

Game Changer

Given the situation, tax experts argue that it was essential for the government to begin exploring sectors such as online gaming and casinos. “The government in the effort to raise tax revenue started to look at untapped sectors to generate money. However, that exercise, as seen in the attempt to tax online gaming to the highest extent, led it to stumble through established judicial precedents and land itself in no man’s land,” says Rajat Bose, tax partner with Shardul Amarchand Mangaldas & Co.

Following the increase in tax for the gaming industry last year, tax authorities issued notices demanding Rs 1.12 lakh crore in GST for the fiscal year 2022-23 and the first seven months of 2023-24, excluding interest and penalties. In response, 30 petitions were filed by real-money gaming companies, with 27 of these petitions transferred to the Supreme Court from various high courts. The matter is currently sub judice.

The review of the new tax regime, released after the recent GST Council meeting, sheds light on the Centre's decision to pursue this course of action. It was disclosed that the GST authorities have collected over Rs 6,909 crore from online gaming, marking a mammoth 412 per cent increase in revenue from the industry over the past six months. Casino revenue also saw a growth of 30 per cent during this period.

Officials who attended the meeting revealed that no state opposed the 28 per cent tax on the online gaming industry. “All the finance ministers were largely in agreement, as they are also mindful of revenue collections, even if they do not say so openly,” a senior finance ministry official said.

Need of the Hour

While these bonuses for the government may not fully address the significant shortfall in the RNR, they provide a cushion for the Centre, especially as the new GST framework continues to stabilise.

At the press conference following the GST Council meeting, Sitharaman talked about a negative balance in the revenue collected from integrated goods and services tax (IGST), with excess IGST allocated to some states. To address these issues, a Committee of Secretaries, chaired by Additional Secretary for Revenue Vivek Aggarwal, has been formed. The committee is expected to submit its report by the end of October 2024.

Additionally, the Directorate General of GST Intelligence (DGGI), the central investigation and anti-evasion arm under the finance ministry, has uncovered in its recent report the highest-ever GST evasion by the online money gaming industry. The detected evasion amounts to Rs 81,875 crore in 2023-24, spanning 78 cases. Officials suggest that with such large sums at stake, any potential concessions by the Centre to the gaming industry, may be unlikely.

What was initially dubbed an "industry killer" move, they now argue, has turned into the need of the hour for the government.