Demarcating games of skill & games of chance will propel India’s gaming sector: USISPF Report

With the online gaming industry poised for growth, the current “one size fits all” approach to taxation and regulation of the industry is a potential roadblock, states a joint report by the United States India Strategic Partnership Forum (USISPF) and TMT Law Practice.

The report, titled “Path Ahead for Online Skill Gaming in India: Unpacking Global Standards for Regulating and Taxing Online Skill Gaming”, makes the case for a more nuanced regulatory and taxation regime much like those in other countries, and seeks a clear distinction between games of skill and those of chance for taxation and regulatory purposes. This approach, according to the report, will help the sector grow.,

The report further states that painting the entire online gaming industry with the same brush — by conflating online games of skill with games of chance (or gambling) — has stunted India’s growth.

Abhishek Malhotra, partner at TMT Law Practice, says, “By conflating skill-based games with games of chance, we are stifling innovation and international competitiveness. A more nuanced regulatory and taxation regime, similar to those adopted in global markets, would not only provide clarity but also foster sustainable growth in the online gaming sector.”

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According to the report, India’s online gaming sector, currently worth $3.1 billion, can grow to a staggering $60 billion, or 1,935%, by 2034.

The report further states that India stands out for its high tax rate, a 28% Goods and Services Tax (GST) for all formats on the total deposits made by players — and that this practice contrasts with global practices. Several countries have further carved out Fantasy Sports as a distinct category within games of skill and regulate and tax them separately, it added.

The report claims the regulatory frameworks and taxation policies in 12 key gaming markets, including the US, Germany, the UK, Denmark, and Belgium, clearly delineate online gaming and online gambling.

Even the United Nations Central Product Classification (UN CPC), which provides the global taxation framework, distinguishes between online gaming and online gambling.

Per UNCPC, online games (Entry 84391) and online gambling (Entry 96921 read with Entry 96929) are treated as mutually exclusive categories with no overlap.

Online games include role-playing games (RPGs), strategy games, action games, and card games played on the internet, even when played with an entry fee or for a monetary outcome that does not involve any form of gambling.

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Online gambling covers services like lotteries, lottos, off-track betting, and casino services. The report also adds that the North American Industry Classification System (NAICS) categorises gambling separately from fantasy sports and skill-based games.

Sample this: Skillz US INC, which offers skill-based games, has a separate NAICS code compared to DraftKings, which offers fantasy sports games.

The report reveals that all 12 countries have a separate legal definition for games of chance, while eight define fantasy sports separately for regulation and taxation. The report also states that skill-based games receive unique treatment in all 12 countries, treating them as a separate, standalone category.

On taxation, the report says that the tax rates for skill-based games are generally lower than those for games of chance. Across all nations, skill-based games are taxed on platform fees or Gross Gaming Revenue (GGR), ranging from 2% to 25%.

Within skill-based games, fantasy sports are taxed higher than other games of skill, owing to the difference in business models and format. This is similar to India’s previous GST regime, which taxed online skill gaming at 18% of the platform fee, akin to other digital services.

For example, France has transitioned from taxing the total pooled amount to taxing the platform fee to align with international practices and prevent users from migrating to illegal offshore platforms, states the report.

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Additionally, skill-based games do not require permits, licences or whitelisting and are largely unlicensed. Games of chance, on the other hand, are either illegal or licensed and regulated. Fantasy sports may also require permits or licences in 9 of the 12 jurisdictions studied, with Romania,  Brazil, and Germany being the exceptions.

The report states that adopting platform revenue or commission collected as the tax base is crucial to ensuring fair taxation and preventing the proliferation of unregulated, untaxed, and illegal offshore markets that could undermine industry viability and government revenue.

It also advocates for a more nuanced approach to taxation in India. Aligning with global best practices could mitigate the risks of over-taxation and support the sustainable growth of the online gaming sector. Such an approach should consider that the online gaming sector is not homogenous globally; it is subcategorised, taxed, and regulated based on formats, not monetisation models.

The report suggests that this nuanced understanding of the sector will unlock the industry’s growth and boost GST revenue in the long run.

Mukesh Aghi, President and CEO, USISPF, says, “The US has been a significant contributor to India’s gaming sector, accounting for $1.7 billion of $2.5 billion in foreign direct investment (FDI). This reflects the immense confidence global investors have in India’s rapidly growing gaming market … However, for Indian companies to compete on a global stage, we need a level playing field with progressive tax and regulatory policies that align with international standards.”

Aghi said their benchmarking of global gaming markets reveals how other countries have segmented, defined, taxed, and regulated the gaming industry based on formats. “…globally, there is a distinct separation between games of skill and of chance, with skill-based games often receiving conducive treatment. Moreover, even within skill-based games, further differentiation is made to ensure appropriate regulatory frameworks … Sharing these insights will help ensure India’s gaming industry reaches its full potential while maintaining investor confidence.”

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