The GST Council levied a 28% tax on the full face value, or total value of bets placed on an online gaming platform. The move, the industry players have said, is a body blow—one that may lead to the extinction of most.
It will have a significant impact on the online gaming industry as, after a 28% tax rate on the full face value of bets, the winner in a wager would have to further pay a tax deducted at source of 30% from the amount won, according to Abhishek Jain, partner at KPMG India.
“This tax rate was earlier under dispute, but now the government has come up with elements to go ahead with it,” Jain said. “However, the amendments are still awaited.”
The move is likely to adversely affect revenue and may push businesses to be set up offshore or in black markets, according to experts.
Such high rates of taxation are likely to make a lot of businesses unviable, and there will be companies that may move to offshore structures or into black markets while paying zero tax, Jay Sayta, a technology and gaming lawyer, told BQ Prime.
Parag Mehta, partner at NA Shah Associates LLP, concurred, saying that companies would explore the route of setting up entities outside India and earning revenue. He said the firms were also exposed to the potential risk of past liabilities as authorities might open old cases as well.
While setting up shop offshore due to the high incidence of tax may seem attractive, it comes with its own set of challenges.
For one, there are provisions under the GST Act where they will have to register in India and pay the same amount of tax. “As of now, we need to wait for the final amendments to come in and see what can be done,” Jain said.
He is referring to the provision where overseas companies are servicing Indian clients. Referred to as the Online Information and Database Access and Retrieval Services, it includes activities like advertising on the internet, cloud services, the supply of e-books, music, movies, software, digital data storage, and online gaming.
The foreign company will have to register or appoint a person in India to comply with this requirement, Mehta said.
Escaping this requirement might be tricky, Shashi Mathew, partner at Indus Law, highlighted. The government has the power to block games. So, if a company that has been operating in India for a few years goes outside, the government will obviously know and may block a game. Bloomberg