Done by SK Reddy
One of the biggest challenges facing governments today is the rapidly evolving nature of the digital economy, with which regulators are struggling to keep pace.
In fact, the challenge posed by technology-enabled services means that even if one or a few countries create regulations, businesses may simply move to another jurisdiction where the regulations are more convenient for them. However, lack of any rules can play havoc.
One such thing is the crypto meltdown and resulting freeze of transactions by some platforms. A rapidly evolving but unregulated product offering devalued millions by 70 to 100 percent and for some wiped out life savings.
The online gaming industry is posing a similar challenge to regulators. Globally, the industry caters to more than two billion entertainment-seeking consumers, served by a rapidly growing multi-billion dollar industry. For example, according to data released by the Entertainment Software Association (ESA) and NPD Group in the US, total consumer spending on video games was US$60.4 billion in 2021, an 8 percent increase from 2020.
This figure includes revenue across all content categories, including hardware, console, cloud, mobile, portable, subscription spending on PC and VR platforms. Microsoft announced the purchase of US based Activision Blizzard for 70 billion US dollars. Activision Blizzard is highly profitable with annual revenue of 8.8 billion and profit of US$ 2.7 billion, while Roblox, a cash-burning gaming company, boasts a market cap of US$ 24 billion. Roblox offers 20 million games with an average of 32.6 million people logging in a day, according to a report published on Bloomberg. The company has also ventured into the metaverse with supermodel Karlie Kloss, the latest celebrity onboard.
The All-India Gaming Federation, which claims to be the apex industry body for self-regulation of online gaming in India, comprises 70 online gaming companies and has a combined user base of 4.5 crore. According to their estimates, India’s industry is set to reach a revenue of Rs 30,000 crore by 2025. According to the report, investment in the industry is growing rapidly with an investment of Rs 17,500 crore. There are other small and micro IT industries involved in gaming. Financial Express (29.6.22) reports that there are 950 online gaming companies in India. Many companies are single entrepreneurs, offering the games they develop on Google’s Play Store and Apple’s App Store. Most of these games are free to download, although consumers may be at risk of being bombarded with unwanted ads, sometimes obscene or even worse, near-hacked.
Paid games are available for a one-time or monthly subscription fee. There are more complex pricing models that involve the purchase of in-game credits. And then there is competitive online gaming, such as chess.com which is reported to have 57 million members with over 400,00 online players at any given time. Online games include card games (bridge, rummy, poker). From roulette to boxing to war games. Readers will recall the furor caused by the PUBG game developed by the Chinese mega-company – Tencents.
According to Tencent Games, there were around 175 million pubg mobile users in India and they claimed 1.5 crore daily users. The most notable thing is that Dota 2 is played with teams from all over the world. There are professional leagues and tournaments – an event format known as the Dota Pro circuit. International tournaments are 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 to consider regulations for the online gaming industry. This move is timely. India would do well to set up a National Gaming Commission under the Ministry of Home Affairs as an apex and appellate body on the lines of the GST Council, while states may similarly constitute State Gaming Commissions.
Most developed countries have gaming commissions and extensive gaming laws. These bodies are currently seized by troubling problems such as underage gambling and addiction. A report published on Bloomberg on June 29, 2022 stated that the UK is considering updating its 17-year-old gambling law to ban stake capping between 2 and 5 British pounds and free bets for online casinos. There is also a proposal to oblige online casinos to implement an “affordability check” to show how much a user can safely spend. China has taken a step forward. Online games require regulatory approval before launching them. After a gap of nine months, Chinese regulators approved new online games in April 2022. Sanctions were halted due to concerns about child addiction or conformity with Communist Party values.
A Group of Ministers (GoM), chaired by Wharton alumnus, Hon’ble Chief Minister Sangma, is looking at taxation arrangements for casinos, online games and horse racing. News of a 28 percent tax on online gaming has created a frenzy in the media. The industry is standing up against the GoMon report’s recommendation that it will kill the new tech industry. For purposes of equalization levy under OIDAR (GST Act for Foreign Service Providers to Pay Tax for Services Provided to Individuals in India) or income tax, businesses are said to go underground or move to other jurisdictions, creating enforcement challenges for regulators.
The task before the GOM is by no means easy. Rapidly evolving technology, huge customer base and huge revenue have made online gaming a high stakes mix of entertainment and gambling. From intellectually stimulating games like Crosswords to “Perimatch” (tagline: “Play Online Win Real Cash”) from Cyprus-registered and Ukraine-based gaming company Dot The Landscape. The rapidly morphing gaming scenario is a nightmare for any tax administration. How to monitor when a game collects money to collect for a winner (“actionable claim”) or when a player spends time and money entertaining themselves in competitive eSports. Then there are equity considerations, such as casino owners citing online casinos and card games as a way to reduce taxes.
Although the online gaming industry coined the concept of “skill versus chance” that emerged from the SC decisions in the case of Sunrise Associates (2006) and Skill Lotto (2020), the argument is quite typical of the current technological landscape. .
The features in the game blur the dividing lines making such classification a very difficult task. Basically, the guidance post can be the difference between the prize money (actionable claim) and the user-salary but nothing more than the entertainment versus the winning pot, tax rates should be fixed. No doubt this is a challenging task for the tax administration but it is time to build capacity and self-regulation to manage the current complexities of the digital economy. Either way the Council will decide, but it would be unfortunate if the GST authorities alone decide the rates of taxation.
(SK Reddy, IRS. The author is a retired Commissioner.)