Tackling Tax Evasion While Fostering Growth in Online Gaming in India

Introduction

The Directorate General of GST Intelligence (DGGI), a law enforcement agency under the Ministry of Finance, recently identified over 600 offshore online money gaming/betting/gambling companies for potential tax evasion. It highlighted in its annual reports that the real money online gaming (RMOG) sector’s misdeclaration of value and misclassification led to tax evasion of Rs. 81,875 crore in 2023-24, affecting the broader economy and the gaming industry’s reputation. Such illegal platforms commit various economic malpractices, including tax evasion and financial fraud, by misreporting their revenues or exploiting loopholes in the regulatory framework. To combat this, the DDGI was recently accorded certain powers as outlined below to address the issue.

The Current Scenario

Online skill-games were taxed at 18% until 2023, but since then, both skill-based and chance-based games are subject to a 28% GST. This led to a rise in GST revenues by 412% between October 2023 and March 2024, to reach almost INR 7,000 crore, contributing significantly to the exchequer’s kitty. However, this shift also triggered a wave of advertisements targeted towards Indian users from offshore gaming
applications claiming that their platforms don’t attract GST on bets.

A rise in such offshore sites and applications presents a serious challenge to the Indian online gaming ecosystem. Since these entities lie outside the country’s regulatory ambit, they can bypass the GST regime, creating substantial revenue leakages for the government. Additionally, they create opportunities for fraud, cybercrime, money laundering, and even terror-financing activities. Many of these entities specifically target Indian users through deceptive advertising and by using mirror sites, which are hard to take down or prosecute.

In 2023, the union government introduced gaming amendments to the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to regulate online RMGs by placing restrictions on online wagering and betting by them. However, the impact of these rules is yet to be ascertained. In 2024, the DDGI flagged the online gaming industry as a ‘high risk’ sector due to increased tax evasion and money laundering risks. As a result, the Ministry of Finance has authorized the DGGI to designate Additional and Joint Directors (Intelligence) as nodal officers under Section 14A(3) of the Integrated Goods and Services Tax Act, 2017, to enforce compliance and address these risks. It can now send notices to intermediaries to block online gaming apps and sites that evade GST under section 79(3)(b) of the Information Technology Act. The DGGI has also recommended setting up an inter-departmental committee with the ED,
RBI, tax, and consumer affairs departments.

Regulatory and Taxation Challenges

● Outdated Gambling Laws: The Public Gambling Act of 1867 is a colonial-era law that is arguably inadequate in addressing the nuances of online betting, while the Consumer Protection Act, 2019, and Information Technology Act, 2000, suffer from inconsistent enforcement in protecting from fraud and misleading ads in online gaming. This allows illegal operators and micro-betting apps/sites to proliferate.
● High Tax Burden: At 28% GST, the tax rate for online gaming in India is among the highest for online skill games globally. This not only impacts the growth of the sector and employment generation but also de-incentivizes compliance with the taxation regime.
● Cross-Border Transactions: It is challenging for law enforcement to track and prosecute offshore gaming platforms operating in India since they keep
constantly changing their URLs/websites/apps to avoid tax compliance. They may also use the dark web or VPN-based platforms, which makes it difficult to
enforce tax laws. Way Forward Some measures through which these challenges can be addressed are:
a. Strengthening Tax Treaties: For tracking cross-border transactions from offshore tax havens with high financial secrecy, such as Malta, Cyprus, and the
British Virgin Islands, law enforcement agencies will benefit from reciprocal taxation agreements with international bodies for tax enforcement on gaming
platforms.
b. Reducing Tax Burden to Encourage Compliance: The 28% GST rate, particularly for skill-based games, can be reassessed to encourage compliance
and attract more legitimate operators to the market. A moderate tax regime would help balance revenue generation with sectoral growth, while ensuring
users do not look for cheaper offshore alternatives.
c. Amendment of GST Valuation Mechanism: GST for game operators is levied on the total money deposited by users. This has led to a reduction in margins and layoffs, impacting the growth forecast of the Indian gaming industry. Instead, levying GST on Gross Gaming Revenue, especially for skill games, can boost the growth of the sector.
d. Inter-Departmental Coordination: Establishing a dedicated inter-departmental committee comprising GST authorities, IT ministries, RBI, ED, and consumer affairs departments to streamline can be explored to streamline compliance processes. It can utilise AI for monitoring online gaming transactions, address cross-border challenges, and enforce swift penalties for non-compliance.

Conclusion

The Indian gaming landscape has the potential for unprecedented growth in the coming years, with the gaming market projected to reach INR 66,000 crore at a CAGR of 14.5% by 2028, according to PwC. This presents the country a significant opportunity to foster global leadership, innovation, economic growth, and jobs through the gaming sector. However, due to the rapidly-evolving nature of technologies and fragmentation of the regulatory ecosystem, this sector is highly susceptible to tax evasion, financial frauds like money laundering, and cybercrime incidents. This underscores the need for policy
reforms to address the financial challenges emanating from online gaming without compromising the growth of the industry, in order to promote sustainable growth in India’s digital economy .

Sources

● https://www.pwc.in/assets/pdfs/online-gaming-to-the-viksit-bharat-journey-old.pdf
● https://legal.economictimes.indiatimes.com/news/law-policy/inter-dept-panel-may-be-set-up-to-ensure-compliance-by-online-gaming-platforms/113373054
● https://economictimes.indiatimes.com/tech/technology/offshore-gaming-apps-lure-users-with-no-gst-carrot/articleshow/104834094.cms?from=mdr
● https://timesofindia.indiatimes.com/technology/tech-news/dggi-flags-online-gaming-as-high-risk-sector-recommends-blocking-167-websites/articleshow/113379814.cms
● https://economictimes.indiatimes.com/news/india/dggi-identifies-642-online-gaming-cos-for-investigation-mos-finance/articleshow/116371858.cms
● https://www.the420.in/gst-intelligence-new-powers-tackle-tax-evasion/
● https://cleartax.in/s/tax-on-online-gaming-in-india