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One of the biggest challenges facing governments today is the rapidly evolving nature of the digital economy, which regulators are struggling to keep up with.
In fact, the challenge posed by technology-enabled services means that even if one or a few countries legislate, businesses can easily move to another jurisdiction where the rules are more convenient for them. However, the lack of any regulation can have devastating effects.
The crypto meltdown and resulting transaction freeze by some platforms is one such revealing case. The rapidly evolving but unregulated product offerings left millions facing a 70 percent to 100 percent depreciation, and for some, their lifetime savings wiped out.
The online gambling industry presents regulators with a fairly similar challenge. Globally, the industry serves over two billion entertainment-seeking consumers with services 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 United States shows that total consumer spending on video games was $60.4 billion in 2021, an 8 percent increase from 2020.
This number includes revenue from all content categories, including hardware, subscription spend across console, cloud, mobile, wearable, PC and VR platforms. Microsoft announced it would be acquiring US company Activision Blizzard for a whopping $70 billion. While Activision Blizzard is highly profitable with $8.8 billion in annual sales and $2.7 billion in profits, even Roblox, a cash-burning gaming company, boasts a market cap of nearly $24 billion. Roblox offers 20 million games, with an average of 32.6 million people logging in per day, according to a report published on Bloomberg. The company has also tumbled into the Metaverse with supermodel Karlie Kloss, the latest celebrity on board.
The All-India Gaming Federation, which claims to be the industry’s apex self-regulatory organization for online gambling in India, comprises 70 online gambling companies and claims a combined user base of 4.5 million. According to their forecasts, Indian industry is poised to reach 30,000 million rupees in sales by 2025. Investments in the industry are reportedly growing rapidly with Rs 17,500 million invested. There are a variety of other small and micro IT companies that deal with games. Financial Express (6/29/22) has reported that there are over 950 online gaming companies in India. Several companies are sole traders and offer games developed by them on Google’s Play Store and Apple’s App Store. Most of these games are free to download, although the consumer could run the risk of being bombarded with unsolicited ads, which are sometimes indecent or, even worse, almost hacked.
Paid games are available for a one-time or monthly subscription fee. There are also more complex pricing models that involve purchasing in-game credits. And then there are competitive online games like chess.com which is reported to have a subscriber base of 57 million with over 400,000 online players at any point in time. Online games include card games (bridge, rummy, poker). from roulette to boxing to war games. Readers will recall the anger unleashed by the game PUBG, developed by Chinese mega-company Tencents.
According to Tencent Games, there were nearly 175 million pubg mobile users in India and they claimed to have 1.5 million users daily. The most striking story is that of Dota 2, played with teams from all over the world. There are professional leagues and tournaments – an event format known as the Dota Pro Circuit. The international tournament is crowdfunded with over $40 million in prize money, making Dota 2 the most lucrative esports in the world.
The Government of India has set up a Committee of Secretaries to Review Regulations for the Online Gambling Industry. This step is well timed. India would do well to position a National Gambling Commission under the Home Office as the apex and appellate body along the lines of the GST Council, while states could similarly structure state gambling commissions.
Most developed countries have gambling commissions and sophisticated gambling laws. These bodies are currently riddled with vexing problems like gambling and underage addiction. A report published on June 29, 2022 on Bloomberg said the UK was considering capping online casino stakes at £2-5 and banning free bets while updating its 17-year-old gambling legislation. There is also a proposal to oblige online casinos to conduct “affordability checks” to show how much a user is safe to spend. China even went a step further. Online gaming requires regulatory approval before it can be launched. After a nine-month hiatus, Chinese regulators approved new online games in April 2022. The permits were suspended due to concerns about child dependency or conformity to Communist Party values.
A group of ministers (GoM) chaired by Venerable Prime Minister Sangma, a Wharton alumni, is considering a tax regime for casinos, online gaming and horse racing. The media is full of reports of 28 percent taxes being levied on online gambling. The industry is outraged by GoMon’s reported recommendation, saying it would kill a burgeoning tech industry. Businesses are said to be going underground or to other jurisdictions, posing challenges for regulators to implement, whether under OIDAR (GST Law for Foreign Service Providers to Pay Taxes for Services Provided to Individuals in India be) or for the purpose of compensatory levy as part of income tax.
The task before GoM is by no means easy. Rapidly developing technology, immense subscriber bases and massive revenues have made online gambling an intoxicating blend of entertainment and high-stakes gambling. From intellectually stimulating games like crosswords to ‘parimatch’ (slogan: ‘play online, win real money’) from a Cyprus-registered and Ukrainian-based gaming company dot the landscape. The rapidly changing gaming scenario is a nightmare for any tax administration. It is an issue to monitor when a game creates a pot of money that can be collected for a winner (“enforceable claim”), or when a player is simply spending time and money getting involved in a competitive e-sport converse. Then there are parity considerations, as casino owners cite online casinos and card games for a tax cut.
While the online gambling industry thinks highly of the “skill vs. chance” concept that emerged from the SC judgments in the Sunrise Associates (2006) and Skill Lotto (2020) cases, the argument is quite flimsy in the current technological landscape .
The dividing lines have been blurred due to features included in games, making such classification a very difficult task. Basically, the guiding principle could be prize money (actionable claim) and a differentiation between user pays but gets nothing but entertainment versus a pot of prizes should tax rates dictate. No doubt this presents a challenging task for tax administration, but it is time for capacity building and self-regulation to deal with today’s complexities of the digital economy. Regardless of what the Council decides, it would be tragic if the administrative convenience of GST officials were the only argument in favor of setting the tax rate.
(SK Reddy, IRS. The author is a retired Commissioner.)
Updated: July 20, 2022