Navigating Online Gaming Taxes in 21st Century: A Global Overview
In recent times, online gaming has seen a sudden influx where more and more consumers are entering this arena which was untouched a while ago. The world has now witnessed a significant spotlight cast on the realm of online gaming. Similarly, people have now started seeing online gaming as not just a source of enjoyment but as a full-fledged economy to generate income as well as business. With such a change in mindset towards online gaming, taxation policies on online gaming have become a matter of attraction for policymakers. Moreover, recently, India is holding centre stage in the matter of online gaming with the recent proposal to change the taxation policy on how online games and winnings from it has to be taxed. The changes made in India have opened avenues to understand different frameworks that are governing this area related to balancing the taxation revenue as well as consumer interest within online gaming. This article delves into an intricate landscape of online gaming taxation, exploring the diverse approaches adopted by countries such as United Kingdom, United States, India, and several others. By examining the taxation strategies followed in these countries, the focus is to understand the actual need for an ideal and uniform framework which could be implemented for levying taxes on winnings from online gaming and similar methods.
Within the UK, a Remote Gaming Duty (RGD) of 21% is levied on income from online gaming which is to be paid by the organizers and not the consumers. Earlier such tax was limited to 15%, however, in 2021, it was increased to the current mark. Under UK law, remote gaming is understood as those games which are played with a chance of a prize in a remote set-up in which the participants play such games with the use of the internet, telephone, television, radio, or any other kind of electronic or other technology for facilitating communication.1
It is interesting to understand that RGD as a tax is not directly levied on the person who is playing the game i.e. person who is making the payment to play games. Instead, the tax is levied on Gaming Providers which are dominantly businesses that contract directly with UK customers for them to participate in remote gaming. So, gaming providers are liable to pay RGD on the profit booked by them from remote gaming played by a UK person regardless of where that person is currently living. Thus importantly, gaming providers are liable to pay RGD only on that profit which they have booked from providing their services to UK persons. As per law, a UK person is considered to be an individual who usually lives in the UK or a body corporate which is legally constituted in the UK. Therefore, for any profit earned from other persons not covered under the definition of UK persons, gaming providers are not liable to pay RGD over the profits booked through them. Other than that, there is no gambling tax for consumers as it is a game of chance, however, for game of skills such as E-sports, income from that is taxable and will be included as part of your total income for tax purposes.2
In USA, taxation on e-gaming or money earned from online games is not a straightjacket formula. Different States in US have their own state-specific laws. Although, there is a flat tax which is deducted from the earning from E-sports and online gaming, nonetheless, the exact rate depends on the State under which the jurisdiction for taxation is called for. On an average, most states usually have a 10% to 15% tax for online gaming. However, the tax rate is increased to 30% for any winnings that you may have through online sports or e-sports as a medium. In the case of gambling or money earned through online betting, there is a flat federal tax rate of 24% that is applied3 At the same time, it is important to highlight that some E-gamers or Online Gamers are considered to be an employee and thus, are liable to pay tax on any income generated from playing games.
In a recent move, the government has now levied a 28% Goods and Service Tax (GST) on online games, casinos and horse racing4 This measure has been decided by the GST Council in their 50th meeting that took place on 11th of July, 2023. As a result of this measure, a uniform tax would be effective from the 1st of October, 2023. The scope of this tax will be over the face value of the chips purchased in the case of casinos, on the full value of the bets placed with bookmaker/totalisator in the case of horse racing, and on the full value of the bets placed in case of online gaming.5 Within the legal framework, it is proposed that an amendment would be brought into force under the GST law wherein within Schedule III, these categories would be included as taxable actionable claims. Actionable claims are defined as goods under CGST Act, 2017 and to understand actionable claim in simple terms, it can be understood as a claim to an unsecured debt or to any beneficial interest in movable property that is not in the possession of the claimant.6 At present, only lottery, betting, and gambling are classified as actionable claims. With this amendment taking place, even online gaming and horse racing will also fall within this category.7 Due to such substantive changes, taxes levied on online games will comparatively change.
At the moment, the tax charged on online games is less as only 18% tax is levied on platform fees charged by the gaming platforms and none is taken beyond that based on face value which is proposed in the new regime. To help understand the current and proposed change in tax, supposedly a consumer buys online gaming chips of 1000 Rs. on which the platform charges a 20% platform fee i.e. 200 Rs. Now according to the present framework, an 18% tax would be charged on the platform fee which is 18% of 200 Rs. However, under the new tax regime, there is a direct tax of 28% on the face value of the money of the consumers i.e. 28% of 1000 Rs. It is understood that such massive change in taxation policy with regard to online gaming and other aspects is done with the aim to discourage consumers from playing such games. Hon’ble Finance Minister of India Nirmala Sitharaman has expressed that her intent of imposing such tax is not to end any industry but rather to address a “moral question” about levying tax on both online gaming and other “essential items” necessary for human survival at the same rate. So to ensure that no unjust incentives are provided to this industry, a unified decision is taken place where maximum states have supported this measure with the objective to demote the growing addiction to online gaming, especially among children.8
Different countries follow different mechanisms to charge tax on online gaming. For example, France and Germany levy taxes on gross revenue for online gaming firms. According to the report prepared by EY India, France is levying tax on online gaming at 1.8% of the stake value of wagers whereas Germany is levying tax of about 5.3% of the gross revenue.9 Similarly, countries like Singapore, Philippines, Estonia, Malta, Italy, Australia and Malaysia are also levying taxes on the gross revenue of online gaming firms ranging from 3.5% to 28%.10 Poland on the other hand charge a 12% flat tax on the turnover of the licensed companies11
At present there is no uniform international practice governing the area of the online gaming sector regarding the tax that is need to be paid. Different countries have different mechanisms of levying tax on online games such as GST, VAT, etc. Moreover, some countries may charge the gamers while some may prefer to charge the organizers, and few would decide to charge both.12
Hence, there is a problem of uniformity. Nevertheless, as per the report published by Copenhagen Economics, a tax rate between 15% to 20% on online gambling or online games of chance can provide high channelization as well as high tax revenue. They also provided that in case of tax above 20%, it will result in lower channelization and lower tax revenue, making the online eco-system less competitive and forcing consumers to look for operators outside the system. Similarly, if it is taxed below 15%, it may result in incremental increases in an already high level of channelization, but at the expense of substantially lower tax revenues.13
Different reports have cited that levying a tax on Gross Gaming Revenue is the most effective mode of putting a tax on online gaming as the burden is comparatively less and the competition is maintained. This is in similar lines to what India was doing with an 18% tax on platform fees profit. However, with the new amendment, there is a big threat from online gaming firms who may want to relocate or end the practice in India due to a substantial increase in the taxation rate which will be a big disincentive.