[Rupam Dubey and Parth Kantak are 3rd-year B.A., LL.B. (Hons.) students at the National Law School of India University, Bangalore
This is a continuation of Part I]
The preceding segment of this post examined the taxation framework enforced upon the realm of online gaming in India and the dual taxation regime of the Union Government which leads to a situation of double taxation, imposing an unfair burden on the gaming industry. In this section, we will delve into two specific aspects. First, we will examine tax structures implemented in jurisdictions having the most prominent online gaming markets, aiming to ascertain the international exemplars of optimal tax practices within this domain. Second, we explore the advantages that accrue to the Indian ecosystem from the assimilation of these international best practices, as well as the adverse consequences that may flow from their neglect, employing a method akin to cost-benefit analysis.
Comparative Analysis of Tax Practices and Rates in Jurisdictions Worldwide: A Comprehensive Examination
The introduction of taxation on online gaming in India is a recent development, and the income tax authorities have been consistently providing clarifications to assist the industry in calculating taxes. Considering that the online gaming industry is projected to reach $8.5 billion by 2027, it holds the potential to contribute to the country’s GDP and support India’s goal of becoming a trillion-dollar digital economy by 2026. Therefore, any alterations to the tax structure should be sustainable to foster positive growth. Inappropriate policy signals could hinder or even devastate this emerging industry.
To ensure a balanced approach towards promoting the online gaming industry while preventing tax evasion, we examine successful international jurisdictions. For example, in the United States, the regulations pertaining to online gaming differ based on the policies of individual states. Daily Fantasy Sports (DFS) operates under the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, which categorises fantasy sports as games of skill rather than gambling. As a result, DFS winnings are considered taxable income, and an excise tax of 0.25% is applied to the entry amount. If a user’s winnings surpass a specific threshold (e.g., $600), the platform may issue a 1099-MISC tax form, which is an Internal Revenue Service form which is used to report certain kinds of miscellaneous compensation. Regarding online games of skill like poker and rummy, a standard income tax rate of 24% is applied to both online and offline casino games in the US.
Similarly, in the UK, online gaming operators, including skill-based platforms, are subject to Remote Gaming Duty (RGD). RGD is a tax imposed on the gross gaming yield (GGY), which represents the amount remaining after deducting the winnings paid to customers from the total stakes received. The current rate of RGD is 21% for games of chance, making it comparable to TDS in India.
In the UK, online poker and rummy games are considered forms of gambling. Individuals who win money from gambling activities, including online poker and rummy, are generally not subject to tax. This applies to both professional and recreational players. However, the platforms where the bets are placed are taxed at a rate of 25%, regardless of whether they are domestic or foreign.
The taxation of fantasy games in the UK depends on whether they are considered gambling activities. Since gambling activities are not taxed in the UK, if fantasy games are classified as gambling, they are not subject to taxation.
Additionally, Australia, known for its active gambling and sports betting markets despite its relatively small population, has specific laws governing online gambling. The Interactive Gambling Act 2001 (Cth) and Interactive Gambling Amendment Act 2017 (Cth) were enacted to regulate online gambling activities. These laws prohibit online gambling contests that combine chance and skill, offer cash prizes, require entrance fees, or involve bets among participants on online platforms. However, an exemption is made for betting on “sports events” to accommodate Australian onshore betting operators.
In Italy, the tax regime applied to online gambling is profit-based. The tax rates are 20% for games of skill (including poker tournaments) and casino games, card games (including poker) and bingo, and 22% for sports betting, which can include fantasy sports. Italy holds significance as it currently ranks as the fourth largest market globally and the second largest in Europe.
Considering these international frameworks, it is evident that other countries either have a single taxation system or a dual taxation system, where the effective tax rate does not exceed 40%. Furthermore, it is important to note that the tax imposed in these countries is based on the Gross Gaming Revenue, which includes platform fees. In contrast, in India, the tax is imposed solely on the prize pool. This effectively raises the tax rate to up to 55% compared to the pre-GST regime. Additionally, the GST applied to online gaming is levied on the consideration paid by a player, which further adds to the prize pool. Therefore, not only is the tax rate high in India, but the multiple taxes imposed on the industry are based on the same object – the prize pool. This results in dual taxation and an unfair burden on the industry.
Implications of a Favorable Tax Policy in India: Necessity for a Change in Tax Policy in Relation to Online Gaming
The tax structure in India can be divided into two components: a TDS of 30% and a GST of 28%. The flaws of this tax structure, particularly the issue of double taxation and the unsustainability of applying GST, have been discussed in the previous section. Not only does the tax structure pose problems, but also deviates from international best practices.
The jurisdictions examined earlier, primarily apply income tax rates ranging from 20% to 25%. They do not have tax rates that exceed this range, nor do they impose GST, let alone follow a policy of double taxation. This disparity disincentivises Indian businesses from operating within the country. Moreover, since the burden of such taxes would be passed on to consumers, it would also discourage consumers from participating in online gaming, or drive them towards unregulated offshore betting platforms, as explained later in this post. Therefore, such a high tax rate would hinder the growth of the Indian industry.
Furthermore, a higher tax rate discourages small innovators and businesses from introducing new ideas and expanding the scope of the field since the high tax rate eats into the limited capital with which these businesses typically start. Such a situation contradicts one of the objectives of the Government in making amednments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code), 2021 to include online gaming, which is to encourage innovation. The high tax rate indicates a certain reluctance on the part of the Government to create favourable tax policies. Despite positive intentions, the negative impact would be felt by small innovators and businesses, preventing the democratisation of the industry and leading to dominance by market leaders who possess greater capital and market share.
While a higher tax rate may result in increased revenue for the Government in the form of taxes, the adverse effects on the industry could gradually reduce tax revenue. By hindering industry democratisation and restricting its expansion, the Government would receive less revenue. Therefore, although the Government may initially generate significant revenue in the short term, it would ultimately be at a disadvantage in the long run.
Another consequence of a high tax rate would be consumers gravitating towards more profitable alternatives, such as offshore unregulated betting agencies that evade taxes. Since these companies themselves evade taxes, they do not pass on the tax burden to the consumers. Consequently, consumers can take home a larger portion of their winnings compared to a regulated setting with a high tax rate. The Government has already recognised this issue and taken measures by issuing advisories against advertising online betting platforms, as advertisements are a means through which they become accessible to the general public. However, if the Government fails to actively address this problem by implementing an appropriate tax policy, it is likely to exacerbate. Considering these factors, it is imperative for India to revise its tax policy regarding online gaming.
Conclusion: The Way Forward
In conclusion, it is clear that India needs to change its tax policy in relation to online gaming, and we put forth three key recommendations in this regard.
First, it is crucial to adjust the TDS rate to an optimal level, which falls within the range of 20-25%. As highlighted earlier, India’s current TDS rate is significantly higher than that of other countries. Lowering the TDS rate would align with international best practices and create a favorable environment for the industry. Additionally, applying the tax on the Gross Gaming Revenue, as argued in Part I, would be a more reasonable approach.
Second, it is advisable to eliminate the application of GST. Following international best practices, India should refrain from imposing GST on online gaming. This step would help avoid issues related to double taxation and other negative consequences that were outlined in the previous section.
Third, addressing concerns related to addiction and other social issues should be approached through technical solutions rather than solely relying on high tax rates. While the Government’s intention to prevent excessive addiction is valid, a high tax rate alone is not an adequate solution. Implementing technical measures such as raising awareness about the risks of excessive gaming, setting limits on betting amounts based on players’ losses and other relevant factors, implementing age restrictions, and other suitable strategies would be more effective in tackling addiction. These technical solutions should be thoroughly examined and implemented by the appropriate Government agencies. However, it is important to note that while these solutions would help address addiction, combining them with a higher tax rate could hinder the industry’s growth. Therefore, a careful balance is needed. By adopting these recommendations, India’s tax policy can be optimised, fostering industry growth and generating significant revenue for the Government.
– Rupam Dubey & Parth Kantak