[Tejaswini and Vidushi are students at Dr Ram Manohar Lohiya National Law University.]
In furtherance of the release of the decision of the Goods and Services Tax (GST) Council's 50th meeting, Parliament has recently introduced Central Goods and Services Tax (CGST) Act (Amendment) Act 2023 and Integrated Goods and Services Tax (IGST) Act (Amendment) Act 2023, to levy a uniform 28% tax on full face value for online gaming. These revisions seek to aid in combating money laundering, illegal income, and black money activities. It is also claimed to assist in identifying and penalizing those who evade taxes or indulge in fraudulent practices. The article attempts to exhaustively understand the interrelation between taxation and curbing illegal activities in light of the revamped solution offered under the abovementioned meeting report. The article explores the motivations which propelled the revision and amendments to the existing CGST and IGST laws. After scrutiny, it brings forth the proposed solutions of doing away with the procedural setbacks and lacunae and accordingly discusses the intricacies of the amendments. As the narrative winds down, the article aims to determine whether the GST increase perfectly aligns with the concerns that prompted their arrival.
Deconstructing Criticisms: Are Critics Spawning New Challenges or Just Glitches?
In recent years, the landscape of the online gaming industry has undergone a remarkable metamorphosis, evolving from an unregulated sector into a structured market. The proposed imposition of exorbitant taxes and rigorous regulatory tax compliance for this industry has raised significant concerns among scholars and taxation experts.
The primary aim of the government in levying the GST is to harness this expanding market's burgeoning potential and channel its contributions toward the Indian economy. The industry's unbridled growth, extending beyond the scope of taxation, was resulting in substantial revenue losses for the government. This imposition is anticipated to generate an impressive annual revenue of INR 20,000 crores for the government, which it was losing on to otherwise. The contention to tax this unregulated industry therefore seems like a fair proposition prima facie. Nevertheless, a significant majority of experts hold a contrasting viewpoint, grounding their statements in the observation that this strategy runs counter to the principles outlined by the Laffer curve theory.
Through critiques’ lens: Their viewpoints under spotlight
The Laffer Curve, an economic concept introduced by economist Arthur Laffer in 1979, postulates that exceedingly high tax rates can culminate in reduced tax revenue. For instance, at a zero tax rate, revenues are understandably zero. At a 100% tax rate, the government theoretically garners zero revenue due to the disincentive for taxpayers to work or their inclination to evade taxes.
The application of this theory stems from the notion that a 28% tax rate is excessively elevated and surpasses the optimal threshold for sustainable revenue generation. This assertion is grounded in the comparative distinction between the internationally recognized best practices and models as compared to those adopted by India.
Two primary tax models govern this landscape: the gross gaming revenue (GGR) tax model and the deposit or turnover tax model. Under the GGR model, taxes are levied at a higher rate on the operator's earnings after deducting the prize pool. In simpler terms, taxation pertains only to the platform fee. This value is often subject to further reductions, such as bonuses, discounts (within India), and licensing fees (in jurisdictions where licensing is compulsory). Conversely, the deposit or turnover tax model imposes taxes on the entire entry amount without deductions from the prize pool. Thus, the taxable value is the entry amount itself, often subject to a low tax rate. Notably, global trends veer towards the GGR model, driven by the desire to augment tax revenues and enhance compliance, as evidenced by the approaches of the UK and France. In the former, higher tax rates are applied to a smaller taxable amount, whereas the latter employs a lower tax rate on a larger taxable amount. India has adopted a mutated hybrid approach, imposing a burdensome 28% rate in contrast to the international norm of 5% to 20% and applying it to the entire taxable sum (illustrated in the graph below).
The graph accentuates India's imposing 28% tax rate, outpacing not just the lower rates in countries such as Malaysia (6%) and Singapore (7%) but also the higher rates in the UK (21%) and Sweden (18%). Adding further to this discourse is the application of the GGR model in these four nations, taxing a smaller revenue base when compared to India's hybrid model, which taxes a larger one. This amplifies the relatively heavier tax burden on India's online gaming sector.
A recurrent argument posited by scholars is that the proposed taxation structure risks propelling gaming platforms into the realms of the dark web or grey sites, evading the oversight of taxation authorities. This is how proponents popularly claim this theory will manifest in reality. A tax burden asserted to coerce players to explore alternative avenues and potentially compel gaming platforms to shutter operations or exit the Indian market, akin to past experiences with cryptocurrencies and virtual digital assets. However, these arguments against the measures are inherently flawed in their reasoning.
From critiques to catalysts: Bolstering the case for GST imposition
The potential impact of reducing tax rates on revenues hinges on the ‘labour supply elasticity’ theory. In this context, it involves assessing the degree of responsiveness online gamers exhibit towards heightened disincentives. The outcomes could be adverse for the industry if gamers within the online gaming industry display sufficient elasticity so as to adapt and transition away from online gaming. This deliberation necessitates a nuanced comprehension of human behavior, financial incentives, and the intricate network of economic dynamics that influence the ramifications of fiscal policy adjustments. Given the absence of government data on this matter, it is equally plausible to assume that the online gaming market is inelastic to these taxes as it is to assume it is elastic. Hence, it can just as reasonably be asserted that an increase in taxes will likely not cause a reduction in revenue.
Moreover, even if one were to entertain the notion that the aforementioned assertion lacks validity and the market is genuinely elastic, heightened taxation will likely compel a significant portion of the online gaming industry to migrate toward the darker realms of the internet. This migration is anticipated to result in a decline in revenue, thereby undermining the very impetus behind this tax strategy. In order to effectively address the inadvertent pushing of this industry into obscure online niches, the article introduces an innovative proposal to navigate this challenge in the forthcoming section.
Seamless Solutions: Progressively Eradicating Procedural Setbacks and Lacunae
Now that it has been proved that the argument is flawed, a pertinent question that arises for the reader’s consideration is if it is possible to track illegal commercial activities on the dark web and impose a tax on these transactions. Can tracking illegal commercial activities on the dark web and imposing taxes on these transactions be feasibly executed? In addressing the first aspect, the possibility of tracking illegal activities on the dark web comes into focus. This can be achieved by closely monitoring the transactions occurring within this domain, which generally materialize in two primary forms: traditional bank transactions and cryptocurrency exchanges.
It is essential to acknowledge that despite attempts to cloak actions and obscure documentation, there remains an indelible audit trail when funds are channeled into a bank account – often necessitated by the digital nature of online transactions. As for tracking cryptocurrency, noteworthy progress has been made in this direction across jurisdictions. For instance, a group of researchers based in South Korea developed a system called MFScope. This framework is intentionally designed to gather and oversee information concerning cryptocurrencies employed within the dark web. Its core objective is to discern the roles these cryptocurrencies play in various illicit activities.
Drawing inspiration from such endeavors, a parallel can be drawn for India. A comparable system could be instituted to monitor cryptocurrency transactions related to online gaming within the dark web. Furthermore, the discourse shifts to the imposition of taxes on these activities. Within India, it's pertinent to recognize that illegal income is subject to taxation. In the context of cryptocurrencies, which may not fit squarely into the categories of money or securities due to their lack of recognition as legal tender by the Reserve Bank of India, they are categorized as “goods” under the GST Act. This classification is due to their non-exemption in Schedule III of the GST Act and the absence of relevant notifications issued by the concerned authorities. Consequently, cryptocurrencies fall under the purview of GST and are thus subject to taxation.
By virtue of establishing that transactions involving cryptocurrency, including those transpiring within the dark web, are trackable and fall under the ambit of taxation as per the GST Act, it becomes evident that the anticipated revenue stream need not diminish.
Striking Balance and Charting Future Growth
In the past 5 years, India's online gaming industry has boomed remarkably, showing an annual growth rate of about 28-30%. The government's intention to oversee the sector through taxation stems from a genuine concern. While critics brand this move as "unconstitutional, irrational, and egregious", accusing ulterior motives of exploiting the sector for revenue until it dries up, a balanced perspective involves considering both international comparisons and government concerns. Striking a balance between these viewpoints means avoiding an outright ban, which might not gain popular support. Similarly, advocating for regulation through legislation rests on shaky ground, as online gaming, similar to gambling, is seen as inherently immoral and contrary to public policy due to its potential to disrupt work ethics, promote crime, and foster addictive behaviour.
Thus, the decision to impose taxation represents a well-rounded strategy that aligns with a broader stance on morality, public welfare, and cultural ethos. This echoes the importance of historical insights on gambling, morality, and taxation, emphasized by Law Commission Report 276, which draws upon age-old wisdom to validate this taxation approach, “if the act of gambling cannot be halted within the realm, it should be subjected to regulation” (Verses 935 to 939, Katyayana Smriti).