Penalising Online Gaming is Undermining India's Digital Credibility

From the UPI stack to the India Semiconductor Mission, from Aadhaar-enabled services to the recent AI policy roadmap, the country has built undeniable proof of work in future-focused, digital-first technologies. Unequivocally, these are strategic bets on India's place in the 21st-century tech economy.

But even as one arm of the state rolls out incentives and global investment roadshows, another is tightening the noose with a ₹1.12 lakh crore retrospective tax bill on online gaming, a sector born of the same digital DNA. It's not just the sum that stuns, but the subtext: innovate all you want, just not in the wrong vertical. This contradiction reveals a deeper discomfort with recognising gaming as a legitimate, high-growth pillar of India's digital economy. Beyond the overreaching conflation of games of skill with games of chance, the nationwide policy reaction to online gaming reveals a credibility crisis. From prohibition to over-taxation, such reactionary policymaking often masks indecision. Lazy governance dressed up as moral panic doesn’t strengthen institutions, it weakens trust.

This isn’t limited to central taxation but plays out starkly across state-level legislation as well. Several states have introduced legal measures and bans around online gaming, for example, The Telangana Gaming (Amendment) Act, 2017 expanded the definition of a common gaming house to include cyberspace, and it effectively made online real‑money gaming or betting subject to prohibition. While this direction aims to tackle social concerns, it also raises questions about how the policy might influence innovation in a digital ecosystem, particularly one that often relies on technological advancement. Unlike the alco-bev industry, where regulators can only print warning labels, gaming platforms can use smart-tech to build real-time safeguards, including player lockouts, spending limits, and ethical design. Regulation here isn’t reactive. It’s programmable.

Online gaming, especially its skill-based variant, is not a fringe anomaly. With 591 million users, ₹232 billion in annual revenue, and a 28% CAGR, the gaming sector represents one of India's most dynamic digital exports. It is a statistically measurable, behaviourally rich, tech-native format that already has global counterparts in regulation, compliance, and monetisation. To treat it as morally suspect while courting foreign VCs for AI and Web3 makes for a hollow pitch.

Moral Policing in a Digital Economy

While Government-backed campaigns have placed gaming as part of the Digital India success story, but now, with a punitive tax regime and an eye-watering retrospective claim, it seems the state supports only a narrowly defined version of the sector. The reality, however, is different. Most Indian gamers don't have the luxury of console-based esports or passive entertainment. They engage with real-money, skill-based games, formats that reward statistically measurable decision-making, not luck.

While Government-backed campaigns have placed gaming as part of the Digital India success story, recent measures like the higher tax rate and retrospective claims may unintentionally suggest support for only certain parts of the industry. In reality, more than 80% of the total revenue of the online gaming industry comes from real-money, which includes skill‑based games—formats that reward analytical, statistics-driven decision‑making rather than luck.

Digital Innovation Can't Be a Hierarchy of Comfort

This debate extends far beyond tax compliance. It's a test of whether India's innovation economy can mature across all sectors, or whether state support is reserved only for industries that fit a narrower, more traditional vision of "tech."

States like Telangana have sometimes chosen to take a cautious approach to new forms of digital innovation. While nurturing a vibrant, youth-driven tech ecosystem is important, authorities may feel the need to ensure that emerging industries align with established norms. As India continues its digital growth journey, finding a balance between encouraging fresh innovation and maintaining regulatory comfort will be key to keeping the national narrative inclusive and forward-looking. If India is to maintain its digital credibility and unlock the full potential of its demographic dividend, it must move beyond sectoral pick-and-choose. Innovation cannot be selectively encouraged. The outright ban on real money gaming in Telangana is a cautionary tale of how legal overreach can stifle one of the country's most dynamic digital industries, sending a message that is at odds with India's ambitions as a global digital leader.

While sectors like clean energy and AI receive institutional nurturing, gaming is being boxed into irrelevance through punitive taxation and dated legal analogies. The message this sends is internally incoherent. One sector gets startup accelerators, while another gets tax terrorism.

A Trust Breakdown, not a Tax Debate

India's digital policymaking has shown maturity in domains like fintech, HealthTech, and data privacy. In contrast, the regulatory imagination for online gaming remains archaic. A sector growing at 28% CAGR, employing 66,000+ people in high-skill roles, and attracting over $1 billion in investments last year alone, still lacks a central, harmonised framework for classification or compliance.

Instead, what the industry got was a blindside, not just a 28% GST, but its application on player deposits and a massive retrospective demand based on rules that were ambiguous when these companies operated. That isn't just bad economics; it's a crisis of trust. Regulatory ambiguity followed by retroactive punishment discourages good-faith compliance and sets a dangerous precedent for all digital-first sectors.

The consequences are already unfolding, which creates a lose-lose scenario for India. If this continues, India will not just lose gaming companies, it will lose an entire layer of its digital economy to policy neglect.

The Future at Stake

The stakes are particularly high given India's demographic advantage. If India continues to reward innovation only in sectors that fit a legacy-approved blueprint, it risks fragmenting its own digital credibility.

The online gaming industry, led by young entrepreneurs, consumed by young users, and built on exportable tech talent, is being penalised not for non-compliance, but for existing outside a narrow vision of acceptable innovation. In a country where over 60% of the population is under 35, stifling one of the most vibrant, youth-driven digital sectors isn't just poor economics, it's a credibility crisis that India's innovation story can't afford. You can’t build a world-class digital economy while telling an entire generation their innovation doesn’t count. To dismiss gaming wholesale is to throw away the baby with the bathwater.

Authored by Mr. Amrit Kiran Singh, President, Skill Online Games Institute (SOGI)