Get the taxation of gaming right, to realise the sector's potential

Should India encourage, by policy, games in which chance plays a major role? The law views gambling with a beady eye, and how appropriate that is, is itself open to question. 

The extent of betting that goes on, in relation to cricket matches or electoral outcomes, not to speak of the popularity of lottery tickets, is an indication of how ingrained gambling is in popular culture, regardless of the bad rap Yudhisthir gave games of chance with his reckless staking of his kingdom, brothers and wife. 

However, the Supreme Court makes a distinction between pure games of chance and games in which skill has a greater role than chance. Games like rummy and poker have been held to be games of skill, and not gambling. Earlier this year, the High Court of Karnataka ruled that this distinction would hold in the case of online games as well.

Lifeline for gaming industry

This distinction is a lifeline for the rising industry of online games, not mere juridical hairsplitting. Whether it is rummy or poker played online or fantasy sports, any game in which skill predominates in achieving success, is legitimate in the eyes of the law. When legitimate money is made, it is, of course, liable to tax. 

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Taxation of online games is in its early stages of evolution and thus open to extortionate demands by the tax authorities, eliciting cries of existential pain from the gaming companies, and legal scrutiny of those demands. But the subject is of general public interest going beyond the enjoyment of the players, profits of the companies and revenues of the taxman.

As economies mature, the service sector will have to absorb an ever larger share of total employment. Contemporary manufacturing is skill- and capital-intensive, rather than labour-intensive. Even if the share of manufacturing rises in total output, the share of the sector in employment will not rise in proportion. 

Agriculture will see ever-dwindling shares of total employment. Even the non-manufacturing sectors of industry, such as construction, electricity, water supply and sanitation, will turn ever more automated and lose appetite for workers.

 Skill-intensive entertainment segment

That leaves the tertiary sector, with entertainment as a segment, with enormous potential to grow. Gaming is a skill-intensive component of entertainment, and, within that, games of skill and chance such as rummy occupy their space. Online gaming will generate diverse kinds of jobs, ranging from those in design and web site development to intricate technologies to generate the graphics and run the games; these relatively high-income jobs will generate purchasing power that, in turn, will generate a diverse range of other jobs. 

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Rational taxation of games is part and parcel of the government’s ambition to make India a major player in Animation, Visual Effects, Gaming and Comics (AVGC). Only, it is not. The taxation regime as it stands is irrational and should change.

In online card games, there is both income tax and the goods and services tax (GST). That is how it should be. However, the way these taxes are levied takes you back to your childhood — specifically, the tale about the goose that lays the golden egg. Our taxmen are in a hurry to cut open the belly of the goose.

Tax ambiguity

The income tax code says that tax should be deducted at source at the rate of 30% on winnings. But, as things stand, is it not clear whether it should be on a gross basis or on the net winnings, after setting off the cost of entering the game, besides the losses.

At present, there is a threshold of ₹10,000 for winnings to attract TDS. Reports circulate that this threshold is being lowered to ₹1,000. Thresholds made sense in the mists of time before the arrival of information technology that makes considerations of administrative convenience redundant. Once the appropriate algorithm is in place, the administrative cost of levying TDS on ₹100 is pretty much the same as deducting tax on ₹100 crore.

The point is to levy the tax on the conceptually sound definition of income. It should be possible to separate out the gaming revenue accruing to the gaming company from the residual amount of the table fee that will constitute the potential winning from the game for the player. 

A player will likely play a number of games in a month. It makes no sense to levy a TDS of 30% on every winning without taking into account the gaming company’s take and the losses that the player would make alongside winnings. The tax should be levied on net winnings, and there is no need for any threshold, once there is rational clarity on what is being taxed. 

The gaming company’s income should, of course, be taxed separately. It is a fairly straightforward matter for the tax authorities to ask the gaming company to compute the net gains of its players, after deducting the gaming company’s fees and the losses they make during the period, every quarter or so, and remit the TDS on net winnings to the government.

GST on transactions vs revenues

In the case of GST, stories circulate of the online gaming industry having evaded nearly ₹23,000 crore. This stems from the tax authority’s perception that the gaming company should pay GST at the rate of 18% on the entire value of its transactions, whereas the gaming companies pay GST on the gaming revenue alone, excluding the stake portion going to form the winning for the winning player. 

It is as if a stockbroker were asked to pay GST on the total value of a trade, rather than on the brokerage involved in that trade.

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The industry is upset with the GST Council’s proposal to increase the tax rate from 18% to 28%. There is little reason to spare gaming the highest tax rate of GST, but the point is to levy it on the gaming company’s own revenue, and not on the entire amount comprising both the gaming revenue and the stake, or on deposits.

Tax skill-dominant gaming right, to let this segment of India’s growing entertainment sector realise its potential for jobs, creativity, investment, income and taxes for both the Centre and the states.

(TK Arun is a senior journalist based in Delhi.)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal.)