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India’s online skill gaming industry is warning of operational collapse and mulling legal action after the GST Council imposed a debilitating 28 percent goods and services tax on gaming volume rather than gross revenue.

Meeting in New Delhi on Tuesday (July 11), the council set aside months of warnings from the industry and analysts of the destructive impact of a GST on volume, instead voting to slap a volume-pegged maximum rate on online skill and chance gaming alike, as well as land-based casinos and horseracing.

The council’s chair, national finance minister Nirmala Sitharaman, joined the minister of state for finance and representatives from each state government and some union territories in voting unanimously for the tax on the online industry.

Sitharaman told a press conference that GST legislation will be amended to include online gaming, giving the industry several months of breathing space to prepare legal action against the decision before it can be enforced.

Still, the decision has rocked industry leaders, with trade groups, gaming company bosses, analysts and legal experts aghast at the outcome and the failure to consult with officials over a tax on volume that could wipe out company margins.

Federation of Indian Fantasy Sports (FIFS) director-general Joy Bhattacharjya told CNBC-TV18 that the decision was an “extremely retrograde step” that will scare off billions of dollars in foreign direct investment.

The move to tax volume is “very unfortunate and terrible for the industry” and a “killer blow” that will only benefit illegal operators, he said.

A “dejected” Bhavin Pandya, CEO of heavyweight skill games operator Games24x7, told BQ Prime media that a GST on volume increased effective industry taxes by 1,100 percent and would all but shut down regulated operations as they stand.

“Let me just be very blunt here and say that there is no ‘operations’, there is no business, there is no anything if this were to take effect,” he said.

Pandya added that gaming companies may change their business models, but the present situation will become untenable for almost every interest in the sector.

All India Gaming Federation CEO Roland Landers told the same outlet that the council’s decision would see more than 900 start-ups and other companies in the sector “shut [up] shop”, stripping the government of tax revenue and sending players to illegal offshore websites.

Landers said the industry’s enthusiastic assumption of Cabinet support for online gaming and a digital economy generally, most dramatically expressed by the Ministry of Electronics and Information Technology’s (MeitY) recent forging of a self-regulatory regime, has been eroded by a different branch of government.

“It is going to set us back many, many years,” he said, adding that the government narrative of ease of doing business and helping start-ups would be “completely compromised”.

Still, Landers said the government may reconsider the decision ahead of any legislative move.

At her press conference, finance minister Sitharaman said the council acknowledged a key lawsuit between the industry and a national tax authority that is likely to proceed to the Supreme Court on separable taxation for online skill and chance games.

Survival of the online gaming industry may now hinge on the outcome of this case, in which the Karnataka High Court blocked the central government’s recovery of $2.6bn from a single company in unpaid GST because of the skilled nature of the games in question.

But the council appears to have staked out a position antithetical to that of the Karnataka High Court, with the latter finding that online skill games should not be taxed as gambling activity owing to constitutional protections.

Sitharaman said any distinction between skill games and chance games was not the council’s concern.

“The discussion also looked at what is skill-based and what is chance-based. Whatever be the decision on each of the games being either skill- or chance-based or being both or being neither is not what we are looking at.

“We are purely looking at that which is being taxed, because it creates value, profit has been made, or a wager is being levied. Based on the wager, people earn windfall, which is what betting is all about,” she said.

Legal sources told VIXIO GamblingCompliance that the GST Council decision is likely to be appealed, depending on the wording of any amendment to the GST law.

Gowree Gokhale, a Mumbai-based senior partner with the Nishith Desai Associates law firm, said the GST ruling is a “big blow” for the industry, but the details of the amendment will dictate industry strategy.

“In the backdrop of the recent legal support received by the online gaming industry through [MeitY], I was hopeful that the GST Council would follow suit,” she said.

“However, this development will be a big blow for the industry. Internationally, there have been examples that in case of higher taxation, players shift to underground operators. [So] let us wait for the fine print of the amendment to evaluate whether a legal challenge is viable.”

New Delhi-based Krida Legal managing partner Vidushpat Singhania told VIXIO that the decision’s “conversion into a regulation” will be key in the context of long-standing support for skill gaming by the courts.

“The Indian gaming industry was rising and this will certainly stymie its growth,” he said.

“However, the decision still needs to be converted into a regulation, and all gaming companies I am sure will challenge the regulation that finally comes out as being unconstitutional and against established jurisprudence.”

Ranjana Adhikari, a Mumbai-based partner in the IndusLaw firm’s Media, Entertainment and Gaming Practice, agreed that the council’s “unfortunate” and “surprising” decision, its “blanket approach” on betting and refusal to distinguish skill from chance open up space for an appeal to unconstitutionality.

“The GST Council decision has chosen to ignore this fundamental distinction and has adopted a blanket approach to taxation. Prima facie, this blanket approach seems to be in violation of Article 14 of the Constitution of India in so far as it treats unequals (skill games and gambling) in the same manner,” she told VIXIO.

“It is pertinent to note that the empowered Group of Ministers, which was tasked with assisting the GST Council on the issue, did not eventually arrive at a unanimous decision, and had left the final decision to the GST Council.”

Pertinent to any legal challenge, the GST Council’s decision has triggered unusual unanimity in the wider online industry, with the AIGF and the FIFS previously staking out different political ground to protect their member companies.

Just days ago, the FIFS and Deloitte released a joint analysis that warned of catastrophe for the gaming industry if a GST on volume were applied.