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Source: This post on tax demands from the gaming industry is based on the article “On gaming industry rules, the Indian government is not following the letter of the law” published in ”Indian Express” on 8th November 2023.
UPSC Syllabus Topic: GS Paper 3 Indian Economy – Mobilization of resources (Taxation).
News: The article discusses how Indian tax authorities have made huge and potentially unlawful tax demands on various entities over the years, including gaming companies. This is causing legal disputes and damaging India’s reputation as an investment-friendly country.
What is online gaming?
An online game is available on the internet, accessed through a computer. Players make a deposit and aim to win prizes based on their performance.
What is the current legal status of the online gaming industry in India?
“Game of skill” Vs “Game of chance”: In India, skill games (like quizzes) are mostly legal (Public Gambling Act, of 1867) and one can bet on them. Chance games (like dice) usually aren’t allowed for betting.
Judicial view: Supreme Court in the Chamarbaugwala case set a standard called ‘preponderance of skill.’ This test helps decide if a game is mainly about skill (which is usually legal) or mostly about luck (which could be banned). High Courts in various states have tried to stop online games that involve betting money.
Federal jurisdiction: State have the sole authority to create laws about betting and gambling, as granted by Entry No. 34 of List II in the Seventh Schedule of the Indian Constitution.
Central Legislation:
The Indian Penal Code of 1860 can punish people for showing or promoting obscene content in public, which can include ads for gambling.
The Prize Competitions Act of 1955 outlines what qualifies as a competition prize.
The Lotteries Regulation Act of 1998 says lotteries in India are okay if the state government manages them and the draw is within the state.
Under the Foreign Exchange Management Act of 1999, sending lottery or race winnings abroad is illegal.
The Information Technology Rules of 2011 forbid internet services from hosting gambling content.
Lastly, the Income Tax Act of 1961 and Central goods and services (GST)Act, 2017, ensures that legal gambling is taxed, adding to India’s GDP.
What were the recent tax demands by the government from the gaming industry?
Indian law and court decisions traditionally exempt games of skill from being taxed as gambling. However, gaming companies have been issued show-cause notices for a huge GST demand totaling Rs 1.5 lakh crore for the period between 2017-2022.
Tax authority demands 28% GST on the full amount pooled by gamers, not just on the service fee.
What are the issues with the gaming industry?
Misclassification: The gaming industry is inaccurately labeled as gambling by authorities, challenging the CGST Act 2017, and is burdened by a harsh 28% GST, which could cause business closures.
Retrospective Taxation and Legal Volatility: Unexpected backdated tax claims and legal inconsistencies, are creating a financially and legally unstable environment for gaming companies.
Threat to the Emerging Industry: The gaming industry’s survival is at risk due to excessive tax demands, which not only threatens India’s reputation as a secure investment destination but also risks an industry exodus to unregulated foreign portals if tax standards don’t align with global norms.
What should be done?
Comprehensive Legislation: There is a need for specific laws that clearly define the legality, taxation, and regulatory mechanisms for online gaming.
Establishment of a Regulatory Authority: A central Gaming Authority could monitor industry practices, classify games based on skill or chance, enforce consumer protection, and address potential issues related to crime and societal impact.
Protection of Minors: Enforcing age limits and verifying user age would prevent underage access to online gaming, especially games involving real money.
Responsible Gaming Measures: Limiting the amount and time spent on gaming, offering counseling services, and allowing players to self-exclude could mitigate addiction and financial ruin.
Transparency and Fairness: Removing anonymity and establishing a grievance handling mechanism would enhance user trust and fairness.
Question for practice:
The recent taxation demands on gaming companies by tax authorities will have multiple repercussions for the Indian economy. Comment.
