By: S.K. Reddy
One of the biggest challenges facing the Governments today is the rapid evolving nature of the digital economy, with which the regulators are struggling to keep pace.
In fact, the challenge posed by technology enabled services means that even if one or few countries devise regulations, businesses can simply shift to another jurisdiction where the regulations are more convenient to them. Yet, lack of any regulation can play havoc.
The crypto meltdown and the consequent freezing of transactions by some platforms is one such telling case. The rapidly evolving but unregulated product offerings left millions exposed to a 70 per cent to 100 per cent erosion of value and wiped out of life-time savings for some.
Online gaming industry is posing quite a similar challenge to regulators. Globally, the industry caters to over two billion entertainment seeking consumers, with services being provided by a rapidly growing multi-billion dollar industry. For example, data released by the Entertainment Software Association (ESA) and The NPD Group, in the US, shows the overall consumer spending on video games was US Dollars 60.4 billion in 2021, an 8 per cent increase over 2020.
This figure includes revenues from all content categories, including hardware, subscription spending across console, cloud, mobile, portable, PC and VR platforms. Microsoft announced a buy-out of the US based Activision Blizzard, for a whopping sum of US dollars 70 billion. While Activision Blizzard is highly profitable clocking annual revenue of 8.8 billion and profits of US dollars 2.7 billion, even Roblox, a cash-burning gaming company, boasts of market cap of close to US dollars 24 billion. Roblox offers 20 million games with an average of 32.6 million people a day logging in, as per a report published on Bloomberg. The company has also plunged into metaverse with Supermodel Karlie Kloss, the latest celebrity to onboard.
The All-India Gaming Federation, which claims to be the apex industry body for self-regulation for online gaming in India comprises 70 online gaming companies and claims a combined user base of 4.5 crore. As per their projections, India’s industry is poised to hit 30,000 crore of revenue by 2025. Reportedly, investments in the industry are growing rapidly with Rs 17,500 crore having been invested. There are host of other small and micro IT enterprises involved in gaming. Financial Express (29.6.22) has reported that there are over 950 online gaming companies in India. Several companies are single entrepreneurs,offering games developed by them on Google’s play store and Apple’s App store. Most of these games are free to download, though the consumer could be at risk of being bombarded with unsolicited advertisements, at times lewd, or even worse, near-hacked.
Paid games are available at a one-time or monthly subscription fee. There are more complex pricing models too involving purchase of in-game credits. And then there is competitive online gaming, such as, chess.com which is reported to have a subscriber base of 57 million with over 400,00 online players at any point of time.Online games include card games (bridge, rummy, poker) to roulette to boxing to war games. Readers will recall the rage created by the game PUBG developed by the Chinese mega-company – Tencents.
According to Tencent games, there were almost 175 million pubg mobile users in India and they claimed having 1.5 crore daily users.The most eye – popping story is that of Dota 2 which is played with teams from around the world. There are professional leagues and tournaments – an event format known as the Dota Pro Circuit. The International tournament is crowdfunded with prize money reaching upwards of US$40 million, making Dota 2 the most lucrative e-sport in the world.
The Government of India has set up a Committee of Secretaries for considering regulations for the online gaming industry. This move is well timed. India will do well to position a National Gaming Commission under the Ministry of Home Affairs, as an apex and appellate body on the lines of GST Council, while the states could similarly structure State Gaming Commissions.
Most developed countries have Gaming Commissions and elaborate gaming laws. These bodies are currently seized with vexing problems such as underage gambling & addiction. In a report published on Bloomberg on June 29, 2022, it was said that the UK was considering capping stakes between British Pound 2 to 5 for online casinos and a ban on free bets, while updating its 17-year-old gambling legislation. There is also a proposal to obligate online casinos to implement “affordability checks” to show how much, a user can safely spend. China has even gone a step ahead. Online games require regulatory approval before they can be launched. After a hiatus of nine months, Chinese Regulators approved new online games in April 2022. Approvals had been paused over concerns of children being addicted or conformity with Communist party values.
A Group of Ministers (GoM), chaired by Hon’ble Chief Minister Sangma, a Wharton Alumni, is looking at a taxation regime for casinos, online games and horse racing. Media is rife with reports of 28 per cent tax being imposed on online gaming. The industry is up in arms against the reported recommendation of GoMon the ground that it would kill a nascent technology industry. It is said that business will move underground or to other jurisdictions posing implementation challenges to regulators, whether under OIDAR (GST law for overseas service providers to pay tax for services rendered to individuals in India) or for purposes of equalization levy under Income Tax.
The task before GoM is by no measure easy. Rapidly evolving technology, immense subscriber bases and huge revenues have made online gaming, a heady high stakes mix of entertainment and gambling. From intellectually stimulating games like crosswords to “parimatch” (Tagline: “Play online win real cash”) from a Cyprus registered and Ukraine origin gaming company dot the landscape. The rapidly morphing gaming scenario poses a nightmare for any tax administration. How to monitor when a game creates a pot of money to collect for a winner (“actionable claim”) or when a player is simply spending time and money entertaining himself in a competitive e-sport is an issue. Then there are parity considerations, such as the Casino owners citing the case of online casinos and card games for a reduction in taxes.
While the online gaming industry makes much of the concept of “skill vs chance”, which emerged out of the SC Judgements in the case of Sunrise Associates (2006) and Skill Lotto (2020), the argument is quite specious in the present technological landscape.
Dividing lines have become blurred due to features contained within games which make such classification a very difficult task. Basically, the guidance post could be prize money (actionable claim) and a differentiation made between user-pays but gets nothing except entertainment versus a pot of winnings, should determine tax rates. No doubt this poses a challenging task for the tax administration but it is time for building capacity and self-regulation to manage present day complexities of the digital economy. Whichever way the Council decides, it would be tragic if administrative convenience of GST officers alone makes the case to decide the rate of taxation.
(S.K. Reddy, IRS. The author is a retired Commissioner.)