GST: New tax threatens India’s booming online gaming industry

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Children play games on their mobile phones at a street corner in Mumbai on September 6, 2021Getty Images
By Nikhil Inamdar and Meryl Sebastian
BBC News

The Indian government’s decision to impose a 28% tax on online gaming poses an “existential threat” to the booming industry and could spell its death knell, say experts.

Shares of Indian online gaming platforms and casinos have crashed following the GST (Goods and Services Tax) Council’s decision.

The country’s 900+ gaming start-ups had been paying a small tax on the fee they charged for offering games. But the imposition of a 28% GST on the full face value of a gaming transaction will mean the entire amount collected from players will now come under the ambit of taxation.

According to industry estimates, total tax collection on player winnings will go beyond 50%, including GST, platform commissions and income taxeswhen the new law is implemented.

In effect, for every $100 (£76.8) spent by a player, there will be a “sunk cost” of $28 towards GST, in addition to a $5-15 charge by the gaming platform and a 30% tax deducted at source (TDS) on any winnings drawn.

This will “disincentivise players and is totally inconsistent with global standards” where VAT or GST is levied at a median rate, and that too only on platform fees or commissions, said Sudipta Bhattacharjee, partner at corporate law firm Khaitan & Co.

“The move has completely blindsided the industry. It will shake investor confidence and lead to a funding winter,” Mr Bhattacharjee added.

India’s gaming boom

The online gaming industry has seen a massive boom in India over the last five years, with an annual compounded growth rate of 28-30%. Driven by easy access to affordable smart phones and cheap mobile data, the sector attracted $2.5bn in foreign direct investment, including from the likes of Tiger Global.

But these growth rates will now be called into question as the GST council’s decision will impact startups at “multiple levels”, including their user base, revenues as well as investor sentiment, according to Soham Thacker, Founder & of CEO of GamerJi – an eSports tournament company.

“Many gaming companies, in order to limit the impact on the investors side, may choose to relocate their business outside India,” Mr Thacker added.

“They have killed the multibillion-dollar industry with a single stroke. And at the same time the decision could give a massive boost to illegal and illegitimate operators in the country,” Gaurav Gaggar, Promoter of Poker High, a poker site, said.

Terming the decision “unconstitutional, irrational, and egregious”, the All India Gaming Federation said the government had ignored over 60 years of “settled legal jurisprudence” by lumping online skill gaming with gambling activities.

A visitor sits next to a poster featuring Indian cricketers Virat Kohli and Rohit Sharma (L) at the reception area of Nazara Technologies Ltd., the country's top mobile cricket gaming app maker, in Mumbai on March 19, 2021.

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Gambling, which is seen as a chance-based game, is illegal in many India states and is frowned upon. But most states have allowed online games which are seen as skill-based.

The industry body expects hundreds of thousands of job losses in the online gaming sector because of the latest move.

Gaming startups in India currently employ 50,000 people and were expecting to create another 3,50,000 direct and 10,00,000 indirect jobs by 2028.

A ‘catastrophic’ move

Many gaming companies the BBC spoke to said there was a lack of consistency behind the ruling.

“It is very unfortunate that when the government has been supporting the industry… such a legally untenable decision has been taken,” Roland Landers, CEO of the All India Gaming Federation said in a statement. “It will be catastrophic for the $1tn digital economy dream of the prime minister.”

Indian PM Narendra Modi has on more than one occasion praised the gaming industry as a sunrise sector that had the potential to create jobs and cater to the global market.

Children play games on their mobile phones at a street corner in Mumbai on September 6, 2021

Getty Images

“This kind of extortionist tax regime flies in the face of these steps and advocacy needs to happen at multiple levels to retract this proposal,” said Mr Bhattacharjee.

He expects the gaming industry to unite and mount a strong legal challenge if the federal and state governments go ahead and enact the amendments into their tax laws.

But India’s revenue secretary called the move a “unanimous” decision that would not be reviewed or rolled back.

The moral question

Announcing the decision late on Tuesday, Finance Minister Nirmala Sitharaman said that the GST council, which comprises of federal and state finance ministers, said “no one wanted to kill an industry”.

“But they can’t be encouraged to such an extent over essential goods and services,” she said.

The 28% tax is a “step in the right direction”, Siddhartha Iyer, a Supreme Court lawyer who has been fighting to ban online gaming told the BBC.

Mr Iyer called gaming a “speculative activity”.

“Every week there is a story of someone killing themselves because of this [debts incurred due to online gaming],” he said.

“Here, under the GST regime, the government has taken the view that [these games] are gambling and that is correct in my opinion because you are putting a wager on the performance of something not in your control,” Mr Iyer added. “We tax alcohol and cigarettes because we want to discourage people from these activities, it should be the same for this [online gaming] as well.”

Others like Faisal Maqbool, a former gaming addict who lost close to 400,000 rupees ($5,000, £3,750) while playing an online card game in 2022, say even stricter measures are needed.

“This is an addiction. And it has afflicted children and teenagers. Along with higher taxes, the government needed to put in restrictions on the basis of age, income etc. I vouch for a total ban on these activities,” Mr Maqbool told the BBC.

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Who should pay developing world’s climate change bill?

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Here are three inconvenient truths. First, the world cannot fight climate change without developing countries. Second, developing countries will need massive amounts of investment for climate financing — and much of these required savings will need to be imported. 

Third, the governments of developing countries won’t allow the import of foreign savings if they worry that a backlash from international financial markets might cause financial instability.

The combination of these three truths has produced a predicament that the world has not yet grappled with – that action on climate change is inextricably linked to the financial stability of developing countries, both perceived and actual.

This is a big problem. Estimates of how much investment will be required by developing countries to fight climate change over the coming decades are in the tens of trillions of dollars. 

But developing countries, particularly those in East Asia, lack sufficient domestic savings given the massive amounts of investment already needed to reduce poverty and develop their economies, meaning they typically run current account deficits — where a country imports savings from overseas.

These current account deficits can often be a source of financial volatility. When an international shock occurs, countries with a current account deficit greater than 3% of GDP tend to be punished by the market with capital outflows, hurting the financial sector and the exchange rate.

The last few years have been a case in point. As US interest rates have risen, capital has been sharply withdrawn from developing countries and shifted to the United States to enjoy higher returns. 

This has caused a sudden tightening of financial conditions in developing countries and pushed down their exchange rates against the US dollar, making their foreign-denominated debts larger and, in some instances like Bangladesh, requiring IMF assistance. The same turbulence was experienced during the taper tantrum in 2013 and the global financial crisis in 2008.

Money dealers count Pakistani rupees and US dollars at an exchange in Islamabad. Photo: AFP/ Aamir Qureshi
Money dealers count Pakistani rupees and US dollars at an exchange in Islamabad. Photo: Asia Times Files / AFP/ Aamir Qureshi

Recent estimates suggest that if developing countries were to import the necessary foreign savings to fight climate change, their current account deficits could increase substantially. This is a terrifying thought for developing country finance ministers who have become hypersensitive to growing current account deficits. 

The result is that policymakers limit financial inflows using monetary policy and macroprudential tools to keep the current account deficit in check, constraining economic growth — and in the process, constraining the sustainable investment needed to fight climate change.

To be sure, recent international turbulence has revealed that developing countries, particularly in Asia, have come a long way in bolstering the resilience of their financial systems. 

Decades of reform have strengthened risk monitoring frameworks, hedged risks, liberalized exchange rates, deepened financial systems, strengthened supervisory mechanisms and improved resolution processes for troubled banks and financial institutions.

Not all developing countries face the same challenges, and not all developing countries have the same contribution to climate risks. And there is only so much developing countries can do. While recent crises have revealed how far developing countries have come, they’ve also shown their continued susceptibility to global shocks. 

If developing countries are to import the foreign savings needed to fight climate change, the rich world and the institutions it controls will need to work with them to reduce financial instability.

Luckily, there are practical things that can be done. At the global level, efforts to reform the lending conditions of the International Monetary Fund need to be continued, to reduce the stigma which stops developing countries from seeking assistance. 

Development banks, like the Asian Development Bank at the regional level and the World Bank at the global level, can provide finance directly through concessional lending and grants to ease the financing burdens of developing countries.

An emerging deal between China and the World Bank will likely see China agree to reschedule some of its loans to developing countries where, in return, the World Bank will increase its lending to developing countries, including for climate action. 

The COP27 agreement to loan Indonesia US$20 billion will also help. But given that the size of the green investment required dwarfs the resources of these institutions, development banks will need to be more innovative and use their balance sheets to help backstop the liquidity of developing country governments as they undertake sustainable investments.

Development banks don’t have enough capital to finance the developing world’s green investment needs. Image: Facebook

Bilaterally, rich world central banks need to use currency swap lines and standby loans to plug the gaps in the safety net and ensure that all developing countries have access to foreign exchange in times of need.

And international institutions need to support developing countries by implementing the tools and mechanisms that the countries need domestically to manage risks from capital inflows. 

These tools and mechanisms can also help them to price carbon domestically as part of a global approach and implement domestic regulatory reforms to fight climate change, including the elimination of fossil fuel subsidies.

In a nutshell, climate change is a global challenge that will be won or lost in developing countries. All countries have a shared incentive to ensure the necessary investments are undertaken in developing countries — and that means all countries have a shared incentive to bolster the financial stability of developing countries. 

If the last two years have shown us anything, it’s that we have a long way to go.

M Chatib Basri teaches in the Economics Department at the University of Indonesia and was formerly Indonesia’s Minister of Finance.

Adam Triggs is Partner at Mandala and Non-Resident Fellow at the Brookings Institution and the Crawford School of Public Policy, The Australian National University.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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BRICS currency won’t dislodge the dollar but is a threat

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Could a new currency be set to challenge the dominance of the dollar? Perhaps, but that may not be the point.

In August 2023, South Africa will host the leaders of Brazil, Russia, India, China and South Africa – a group of nations known by the acronym BRICS. Among the items on the agenda is the creation of a new joint BRICS currency.

As a scholar who has studied the BRICS countries for over a decade, I can certainly see why talk of a BRICS currency is, well, gaining currency. The BRICS summit comes as countries across the world are confronting a changing geopolitical landscape that is challenging the traditional dominance of the West.

And while the BRICS countries have been seeking to reduce their reliance on the dollar for over a decade, Western sanctions on Russia after its invasion of Ukraine have accelerated the process.

Meanwhile, rising interest rates and the recent debt ceiling crisis in the US have raised concerns among other countries about their dollar-denominated debt and the demise of the dollar should the world’s leading economy ever default.

That all said, a new BRICS currency faces major hurdles before becoming a reality. But what currency discussions do show is that the BRICS countries are seeking to discover and develop new ideas about how to shake up international affairs and effectively coordinate policies around these ideas.

De-dollarization momentum?

With 88% of international transactions conducted in U.S. dollars, and the dollar accounting for 58% of global foreign exchange reserves, the dollar’s global dominance is indisputable. Yet de-dollarization – or reducing an economy’s reliance on the U.S. dollar for international trade and finance – has been accelerating following the Russian invasion of Ukraine.

The BRICS countries have been pursuing a wide range of initiatives to decrease their dependence on the dollar. Over the past year, Russia, China and Brazil have turned to greater use of non-dollar currencies in their cross-border transactions. Iraq, Saudi Arabia and the United Arab Emirates are actively exploring dollar alternatives. And central banks have sought to shift more of their currency reserves away from the dollar and into gold.

All the BRICS nations have been critical of the dollar’s dominance for different reasons. Russian officials have been championing de-dollarization to ease the pain from sanctions.

Because of sanctions, Russian banks have been unable to use SWIFT, the global messaging system that enables bank transactions. And the West froze Russia’s US$330 billion in reserves last year.

Under a banner with Chinese letter and 'XIV BRICS SUMMIT' five screens show the face of five world leaders in front of flags.
BRICS leaders at the time of the 2022 summit. Li Tao/Xinhua via Getty Images

Meanwhile, the 2022 election in Brazil reinstated Luiz Inácio Lula da Silva as president. Lula is a longtime proponent of BRICS who previously sought to reduce Brazil’s dependence on and vulnerability to the dollar. He has reenergized the group’s commitment to de-dollarization and spoken about creating a new Euro-like currency.

The Chinese government has also clearly laid out its concerns with the dollar’s dominance, labeling it “the main source of instability and uncertainty in the world economy.” Beijing directly blamed the Fed’s interest rate hike for causing turmoil in the international financial market and substantial depreciation of other currencies. Together with other BRICS countries, China has also criticized the use of sanctions as a geopolitical weapon.

The appeal of de-dollarization and a possible BRICS currency would be to mitigate such problems. Experts in the US are deeply divided on its prospects. US Treasury Secretary Janet Yellen believes the dollar will remain dominant as most countries have no alternative.

Yet a former White House economist sees a way that a BRICS currency could end dollar dominance.

Currency ambitions

Although talk of a BRICS currency has gained momentum, there is limited information on various models under consideration.

The most ambitious path would be something akin to the euro, the single-currency adopted by 11 member states of the European Union in 1999. But negotiating a single currency would be difficult given the economic power asymmetries and complex political dynamics within BRICS.

And for a new currency to work, BRICS would need to agree to an exchange rate mechanism, have efficient payment systems and a well-regulated, stable and liquid financial market. To achieve a global currency status, BRICS would need a strong track record of joint currency management to convince others that the new currency is reliable.

A BRICS version of the Euro is unlikely for now; none of the countries involved show any desire to discontinue its local currency. Rather, the goal appears to be to create an efficient integrated payment system for cross-border transactions as the first step and then introduce a new currency.

Building blocks for this already exist. In 2010, the BRICS Interbank Cooperation Mechanism was launched to facilitate cross-border payments between BRICS banks in local currencies. BRICS nations have been developing “BRICS pay” – a payment system for transactions among the BRICS without having to convert local currency into dollars.

And there has been talk of a BRICS cryptocurrency and of strategically aligning the development of Central Bank Digital Currencies to promote currency interoperability and economic integration. Since many countries expressed an interest in joining BRICS, the group is likely to scale its de-dollarization agenda.

From BRICS vision to reality

To be sure, some of the group’s most ambitious past initiatives to set up major BRICS projects to parallel non-Western infrastructures have failed. Big ideas like developing a BRICS credit rating agency and creating a BRICS undersea cable never materialized.

And de-dollarization efforts have been struggling both at the multilateral and bilateral levels. In 2014, when the BRICS countries launched the New Development Bank, its founding agreement outlined that its operations may provide financing in the local currency of the country in which the operation takes place.

Yet, in 2023, the bank remains heavily dependent on the dollar for its survival. Local currency financing represents around 22% of the bank’s portfolio, although its new president hopes to increase that to 30% by 2026.

The drive to de-dollarize is gathering pace. Photo: Wikimedia Commons

Similar challenges exist in bilateral de-dollarization pursuits. Russia and India have sought to develop a mechanism for trading in local currencies, which would enable Indian importers to pay for Russia’s cheap oil and coal in rupees. However, talks were suspended after Moscow cooled on the idea of rupee accumulation.

Despite the barriers to de-dollarization, the BRICS group’s determination to act should not be dismissed – the group has been known for defying expectations in the past.

Despite many differences among the five countries, the bloc managed to develop joint policies and survive major crises such as the 2020-21 China-India border clashes and the war in Ukraine. BRICS has deepened its cooperation, invested in new financial institutions and has been continuously broadening the range of policy issues it addresses.

It now has a huge network of interlinked mechanisms that connect governmental officials, businesses, academics, think tanks and other stakeholders across countries.

Even if there is no movement on the joint currency front, there are multiple issues on which BRICS finance ministers as well as central bankers regularly coordinate – and the potential for developing new financial collaborations is particularly strong.

No doubt, talk of a new BRICS currency in itself is an important indicator of the desire of many nations to diversify away from the dollar. But I believe focusing on the BRICS currency risks missing the forest for the trees.

A new global economic order will not emerge out of a new BRICS currency or de-dollarization happening overnight. But it can potentially emerge out of BRICS’ commitment to coordinating their policies and innovating – something this currency initiative represents.

Mihaela Papa, Adjunct Assistant Professor of Sustainable Development and Global Governance, The Fletcher School, Tufts University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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G7 leaders must resist US calls for more protectionism

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The Group of Seven Summit taking place in Japan this weekend could herald the start of a new era of global protectionism as the US continues its push for a G7-wide “screening of outbound investments” to China in certain cutting-edge technologies.

The European Union and the UK are also reported to be discussing a reinforcement of export controls on semiconductors and other technology that is regarded as critical to China.

As leaders of the world’s seven largest so-called “advanced” economies, which dominate global trade and the international financial system, US Treasury Secretary Janet Yellen, who was in Japan last week for a meeting of finance ministers, has said, “Obviously, it would be most effective if there’s coordinated action by a group of like-minded countries and agreement that this is a useful approach.”

She added that the United States would continue “informal” discussions on the measures with other G7 members, which are Canada, France, Germany, Italy, Japan and the UK.

The existing restrictions to China from the US and others have already led to a sharp fall in high-end tech exports, and with geopolitical competitions between the US and China seemingly intensifying, it is likely Western countries, led by America, will impose further export controls on new sectors and industries. These could include biopharma, biotech, and agricultural products, such as seeds.

While clearly every country needs to look out for its own interests in all levels, I am skeptical about the creeping protectionism and urge political and business leaders to pursue a safe and secure form of globalization.

As we have borne witness to in recent decades, globalization promotes economic growth by facilitating the free flow of goods, services, and capital across borders. When countries open up to international trade, they access larger markets, benefit from economies of scale, and attract foreign investment. This, in turn, leads to increased productivity, job creation, and higher living standards.

Also, critically, it encourages the exchange of ideas, knowledge and technologies among countries. It allows for the transfer of best practices, encourages innovation through competition, and facilitates international collaboration on research and development. 

Through allowing the import of goods and services from different countries, consumers typically gain access to a wider range of products at competitive prices. On the other hand, protectionist measures restrict choices, limit competition, and raise prices for consumers.

Globalization has the potential to lift millions of people out of poverty. By integrating into the global economy, developing countries can attract foreign investment, access new markets, and diversify their economies. 

In addition, a rejection of protectionism fosters international cooperation and diplomacy. By engaging in open trade and maintaining strong economic ties, G7 members can build mutually beneficial relationships with other nations.

This can lead to improved diplomatic relations, increased stability, and enhanced collaboration on global challenges such as climate change, cybersecurity, and public health.

While globalization has its challenges, the benefits outweigh the drawbacks. By embracing globalization and rejecting protectionism, G7 members can contribute to a more prosperous, interconnected, and peaceful world.

Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.

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Ukraine investment safer bet than Silicon Valley

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Shoichiro Toyoda, 1925-2023: a personal remembrance 

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Modi calls for unity at G20 dominated by Ukraine

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Borrell will meet on the sidelines of the New Delhi summit with Chinese Foreign Minister Qin Gang, where he will seek assurances that Beijing will not lend support to Russia’s war effort. “Until now, the answer has been clearly stated by China, ‘it hasn’t happened and it won’t happen,’ butContinue Reading