By Sameer Kochhar
In 2012, India found itself at a crossroads. The nation’s once-booming economy was now grappling with growing uncertainties. At the heart of this turmoil was a decision by Finance Minister Pranab Mukherjee that would reverberate through the economy for years to come: retrospective taxation.
For businesses, this decision was not just a tax but a breach of trust. Global investors, who had once seen India as a land of opportunity, suddenly felt that the game’s rules could change at any moment. Confidence waned, investment slowed, and India’s reputation as a stable economic player was put on the line.
For Mukherjee, the decision may have seemed necessary to assert the government’s power and secure revenue. But for the common Indian, the ripples of this move were far more personal. Families saw the cost of living rise, jobs became scarcer, and economic growth—which promised to lift millions out of poverty—slowed. India’s once-promising future began to seem uncertain.
The retrospective tax was more than just a fiscal policy; it symbolised a system that seemed increasingly disconnected from its people’s aspirations. In this climate of disillusionment and economic stagnation, the winds of political change began to stir.
By 2014, India was hungry for a different path. Narendra Modi’s promise of economic revival and “achche din” (good days) resonated with a populace eager for stability and growth. The stage was set for a political upheaval. The Modi government’s subsequent reforms sought to undo much of the damage caused by years of policy missteps, including the infamous retrospective tax.
I have dealt with this subject extensively in my book The Untold Story of Indian Reforms 1991-2016.
Abrol underlined the fragmented nature of global gaming regulations, where different countries address various aspects such as age appropriateness, anti-money laundering (AML) and gambling laws. However, no country has a comprehensive, end-to-end regulatory framework for gaming. In India, the absence of strong, uniform regulations exposes children and consumers to numerous risks, including data privacy concerns and unmonitored financial transactions in games.
There is an urgent need for strong and balanced regulations in the gaming sector, especially given the rapid digitalization and the vulnerabilities faced by young gamers. Teenagers particularly got immersed in to the world of virtual gaming particularly during Covid. And they are finding difficult to come out of it. This poses significant risks related to financial transactions, privacy and mental health.
Data described as “the new currency,” is especially vulnerable in this sector, necessitating robust protection laws. She stressed that while regulation is critical, it must strike a delicate balance with innovation. Overregulation could stifle creativity and hinder India’s potential to become a hub for digital gaming. The involvement of various stakeholders—government bodies, human rights agencies, and parents—is crucial in shaping a holistic and forward-looking gaming policy.
According to Abrol, retrospective GST demands on the gaming industry will lead to financial burdens and uncertainty. She emphasised that while Section 11A of the GST Act provides an opportunity for reconsideration, the lack of regulatory foresight is detrimental to business confidence and growth in the gaming sector. What is required is clarity and fairness in tax and regulatory policies to foster innovation and ensure a safer gaming environment for all.
Tanmay Bhargav, Partner at KPMG, delved into the significant intersection of digital assets, gaming, and financial crime risks. As India positions itself for a $30 trillion economy, he highlighted that a considerable portion of this growth is expected from the digital sector, particularly digital gaming. However, this rapid expansion also opens doors to substantial financial crimes, including money laundering and tax evasion.
There is increasing focus on virtual assets such as cryptocurrencies, NFTs, gaming tokens and metaverse real estate, all of which are increasingly used in digital gaming. These assets’ decentralised nature, anonymity and liquidity have complicated anti-money laundering (AML) efforts, making it difficult to trace transactions. Gaming assets are becoming increasingly tradable and are often converted into real money through secondary markets or dark web exchanges.
He illustrated how a common laundering operation might begin with cryptocurrency like Monero, passed through online games and eventually returned to real-world dollars. This complex digital-to-real value exchange makes it easier for illicit actors to bypass traditional financial monitoring systems. He also pointed out the lack of clear global and domestic regulations governing this space, with India still working to define whether virtual assets are treated as currencies, securities, or goods.
Taxation is another grey area in the sector. With the GST now applying a 28% tax rate on all gaming activities without differentiating between gaming and gambling, there is concern about retrospective tax demands destabilising the industry. While efforts are underway to regularise taxation and ensure transparency, it is stressed that uncertain regulations send the wrong signal to both domestic businesses and international investors.
In the 2012-13 Union Budget, the then Finance Minister Pranab Mukherjee proposed one of the most controversial amendments to the Income Tax Act, 1961. The amendment enabled the tax authorities to impose capital gains tax on deals involving the transfer of shares in foreign entities located in India. The amendment, which was passed by Parliament in 2012, empowered tax authorities to retrospectively tax transactions. All transactions done after 1962 came under its purview.
The retrospective tax law was passed after the tax authorities lost a case in the Supreme Court related to a tax demand on an $11 billion deal done by Vodafone and Hutchison in 2007. Later, Cairn Energy also served similar tax demands for an internal corporate restructuring carried out in 2006.
The Indian tax authorities fought legal battles with Vodafone and Cairn Energy for several years in India and international courts. The verdicts have gone in favour of Vodafone and Cairn. It resulted in a lose-lose situation. On the one hand, Vodafone, which used to be a dominant player in the telecom sector, is now struggling to survive. On the other hand, the retrospective tax move resulted in hardly any gain to the exchequer. Many taxpayers’ money has been spent fighting the legal battle in India and abroad. It hit business sentiments and badly affected the economy.
Almost 11 years after Pranab Mukherjee’s controversial tax experiment, the GST Council, took a similar decision related to online gaming in July 2023. In its 50th meeting held in New Delhi on 11 July 2023, the GST Council imposed a 28% GST on online gaming, bringing taxes on online gaming in line with casinos and horse racing while scrapping the distinction between ‘games of skill’ and ‘games of chance.’
While I support the introduction of the 28% rate and the removal of distinctions between game types, the challenge lies in the very large tax demands that have been sent to the gaming industry based on a policy interpretation asserting that the higher rate of tax was always valid. This could prove to be the death knell for the industry.
“Section 11A of the GST Act deals with the powers to grant exemptions. Specifically, it allows the government, under special circumstances, to reconsider, modify, or issue exemptions for certain tax demands retrospectively. This means that past tax liabilities could potentially be waived or adjusted, providing relief in cases where a new interpretation or change in policy would otherwise result in large retrospective
– Sameer Kochhar, Reforms Historian & Chairman, SKOCH Group
This provision enables flexibility to address situations where businesses might be burdened with unexpected or unfair retrospective taxes, as is the case with some industries, like online gaming, which have faced large tax demands based on past interpretations of tax law.
Fortunately, the GST Council has recognised this issue, adding Section 11A to the GST Act, allowing for reconsidering or writing off these retrospective demands.
As Radha Abrol, Managing Director of Accenture in India, stated, “In a developed democracy, retrospectively changing the percentage of GST and sending out notices puts pressure on the entire industry. Investments will not come in, innovation will not happen.” She emphasised the need for regulation to counter such issues in the future.
Moreover, Tanmay Bhargav, Partner at KPMG India, highlighted the implications of retrospective taxation, saying, “It sends a very wrong signal to the investors and the business community at large because it creates uncertainty about the business environment.” He pointed out that the retrospective notices have led to concerns about valuation and classification in the gaming sector.
As per information provided by Minister of State for Finance Pankaj Chaudhary in Rajya Sabha, the online gaming companies were served 71 show-cause notices in 2022-23 involving the evasion of GST worth Rs 1.12 lakh crore.
Before 1 October 2023, online gaming was taxed at a rate of 18% GST. This was increased to 28%. The issue is not just about taxing online gaming at the GST slab. The tax demand notices sent to gaming companies mostly pertain to the period before 1 October 2023, the day from which the 28% tax rate was notified to be implemented.
Online gaming companies have challenged the tax demands in courts. The matter is now in the Supreme Court. Irrespective of the judgment, online gaming companies have been severely affected. The online gaming industry witnessed exponential growth during the Covid pandemic, attracting $2.6 billion in Foreign Direct Investment (FDI) between 2019 and 2023. However, no fresh investment has come into the sector since October 2023 following the GST hike. Some companies have even witnessed withdrawal of investments by global marquee investors.
The online gaming industry, once heralded as a sunrise sector attracting close to $3 billion FDI and quickly creating over 100,000 jobs, may now face an existential crisis. With over 900 startups involved in the sector, many struggle to survive amidst uncertainty, which deters the right talent from joining the gaming workforce.
Prime Minister Modi has set a $1 trillion digital economy target. Sunrise sectors like online gaming and artificial intelligence have huge potential. The Union Cabinet recently approved a proposal to set up a national centre of excellence for animation, visual effects, and gaming akin to IITs and IIMs.
These institutions will likely play a pivotal role in creating the right talent for the online gaming industry. However, the businesses involved in the sector will have to create jobs. These businesses need stability and predictability in taxation and other policies. The achievement of India’s trillion-dollar digital economy target depends on the performance of sunrise sectors like artificial intelligence and online gaming.
"What is life, it is preparation for death. What is death, it is preparation for life"– Bibek Debroy, Speaking at 79th SKOCH Summit, 26 March 2022
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