Arvind Datar writes: With high GST on online games, death by taxes

Source– The post is based on the article “Arvind Datar writes: With high GST on online games, death by taxes” published in the “mint” on 25th July 2023.

Syllabus: GS3- Mobilisation of resources

Relevance: Issues related to taxation

News- The 50th GST Council has decided to levy 28% tax on the gross amount involved in online games.

What are the legal aspects related to games of skill and games of chance?

The law clearly distinguishes between games of skill and games of chance.

Games of chance, like roulette or lotteries, rely solely on luck or pure chance to determine the winner. These games are considered forms of gambling or wagering.

According to section 30 of the Contract Act, 1872, legal proceedings cannot be used to recover amounts due from such games.

Section 12 of the Public Gambling Act, 1867 states that games of skill do not fall under the category of gambling. In these games, the player’s skill plays a significant role, and luck or chance has little to no influence on the outcome.

What are issues related to the government ‘s move to levy 28% tax on gross amount involved in online games?

In the world of online games, taxes are not imposed on the entire pooled money. Instead, it is levied on the amount charged for the service provided.

The estimated annual GST collection from online games is around Rs 2,000 crore, which is only a fraction of the total annual GST collection of Rs 15 lakh crore.

The Revenue Secretary claims that the new rates will result in an increased collection of Rs 17,000 crore to Rs 20,000 crore. This would require online games worth over Rs 60,000 crore to be played. It seems highly unlikely.

Increasing tax rates does not guarantee a proportional increase in tax collected. The current taxation system focuses excessively on revenue maximisation.

While the GST collection from the gaming industry might seem modest, it employs a significant number of people directly and indirectly. These employees will pay GST on the goods and services they consume, which should not be ignored.

Implementing such a high GST rate is likely to benefit offshore gaming platforms with illegal activities. It could lead to the downfall of the gaming industry and substantial loss of employment without a significant increase in revenue