A Case for Policymakers to Tax and Regulate Sports Betting in India

GST and Online Betting – What is the Sweet Spot?

Currently, the Indian betting appetite is being satiated by offshore operators who do not fall under the purview of Indian laws. Of course, there are many inherent reasons why this is the case, but the fact remains – lakhs and crores of rupees are flowing in and out of the country , and the tax authorities have not managed to tap into this vein.

For the sake of argument, let’s assume that infrastructure is created that allows for proper taxation and tracking the gambling revenues. The question then emerges:

• Do we tax the betting operator/service provider, customers, or both?

• How do we levy the Goods and Service Tax?

• At what rate do we levy the taxes?

Perhaps, this is where we can take cues from the other developed nations in the European Union and across the world like Singapore, Australia, and the United States. These regions have implemented a tax structure for online games which entails regular tax incomes from gambling houses and sports betting operators.

To put it simply: a flat tax is levied on rake fees collected by the gambling houses. As a rule of thumb, it is recommended that this tax rate must not exceed 20 percent.

The rake fee is defined as the amount collected by the gambling service provider for facilitating the bet between the players. Think of it as a commission that you pay the betting site or the poker site for letting you use its platform.

In many ways, the rake fees may also translate into the ‘profits’ for the gaming providers since mathematically, rake fees are nothing but the total payments made to the provider minus the amount paid out in prizes/winnings to the customers. Of course, it is a little bit more complicated than this, but it makes sense to gambling tax houses on their earnings rather than the total stakes they handle, as seen below.

This is referred to as deemed credit model, and it goes something like this:

A tax is levied on the entire stake value, the total amount pooled/wagered by the players for participating in the game on the platform/gambling house. However, a tax credit/deduction is offered on pay-outs made by the platform, effectively reducing the tax liability to just the net amount (stake value less the winnings).

At the moment, India has employed the latter model on horse betting, but only partially. As per the excerpt on Horse Race Betting in India in ENV Media’s market research titled, ‘Sports Betting, India’s Favourite Invisible Giant,‘ a flat 28 percent GST is levied on the entire face value of bets made at the turf clubs.

The racecourse betting operators have requested to levy the GST only on total commission/service fees and not on the entire stake. Doing so has threatened the viability of the whole system and profitability of the service providers, leading customers to resort to black-market practices . The same reason why the recommended tax rate on rake fees does not exceed 20% is to ensure that punters and operators join the licensing system rather than resort to the black market.

Hence, whatever may be the case, GST should be implemented in the online gaming market. To encourage participation in the system and keep the markets appealing to new investment, the same should ideally be levied on rake fees rather than the entire stake amount handled by the gambling house.

Taxing the Bettors

Now that we have looked at the operators’ side of view, let us look at the customers and bettors. Indian consumers these days are highly tech-savvy as they look to maximise their profits by doing a thorough research and understanding the game. From a sports betting context, cricket betting tips from multiple sources on the internet have allowed bettors to become profitable in the long run. Therefore, their winnings are increasing, and it is only fair that they are taxed a reasonable amount.

One way would be to implement the TDS model – Tax Deduction at Source. Currently, India has levied a flat 30 percent tax on gambling winnings exceeding Rs.10,000 at poker and rummy sites, as per Section 194B of the Income Tax Act. Since the system is already in place, it should be relatively easy to implement it in sports betting. However, the fact that sports betting sites are operating offshore makes it challenging to execute the system.

The other way would require players to declare their sports betting winnings while filing their yearly taxes and then taxing the same at a fixed rate. This requires a bit more research and work from policymakers. Of course, it also considers that customers will diligently file their taxes every year and declare their sports betting and gambling income.

The Way Forward for Betting Taxes

According to a KPMG report that explores the landscape of online gaming in Indiathe country’s gambling revenue is upwards of $130 billion as of 2018. This means the untaxed income here has the potential to contribute to India’s trillion-dollar-economy plan.

The process starts with setting up a licensing and regulatory body in India – much like the Malta Gaming Authority or the UK Gambling Commission – to oversee setting the code of conduct and practices for overseas operators to offer their services in the country. The said body will be responsible for granting operating licenses to betting sites and regulating all forms of gambling in India. The authority will also oversee the operators’ income and other financial elements to ensure fair practice and proper taxation in the region.

As for the customers, mandatory linking of PAN Card/Aadhaar Card to betting sites while account creation can make it easy to track tax liabilities – be it the way of TDS or declaring the taxes at the end of the fiscal year.