In July, the Goods and Services Tax (GST) Council decided to increase the tax on online gaming from 18% to 28%, which the industry was mostly onboard with. Currently, the 18% GST applies to gross gaming revenue (GGR).

However, the GoM had been mulling over applying the 28% tax on gross gaming value (GGV), which is the total value of the stake put in by players, across online gaming, horse racing and gambling. This was criticized by the online gaming industry which cited various court judgments that recognized online games like fantasy sports, rummy etc. as a game of skill.

In online gaming, players combine their money to create a prize pool, which is then used to pay out winnings. The difference between these combined deposits and winnings makes the GRR. Industry experts and stakeholders were worried that applying 28% GST to GGV lead to a significant increase in tax the industry has to pay, and force some firms to shut down.

India's online gaming sector is expected to grow to $5 billion by 2025, according to a report by BCG and Sequoia India. While the sector has seen the emergence of unicorns like Dream Sports and Mobile Premier League, it is still at a nascent stage.

The GoM was set up in May to review GST on online gaming, gambling, and horse racing. In its latest meeting on Monday, it decided to hold consultations with the industry and seek legal opinion before submitting a final report on levying new GST rates. It was also decided that online gaming will not be clubbed with gambling and horse racing where taxes would be levied on the full consideration.

"GoM recognizing the constitutional and legal difference and nuances of online games is very promising," said Roland Landers, chief executive of All India Gaming Federation (AIGF), an industry body for online gaming.

He said that the industry is hopeful that the GoM will arrive at a "progressive and constitutionally sound recommendation for rate and valuation for online gaming."

Rohit Agarwal, founder, and director of gaming marketing firm Alpha Zegus, said that it makes sense not to club online gaming with gambling and horse racing.

"They all have different economics, operating procedures, and profit margins. It only makes sense that they are taxed as per their standards," he said.

Jay Sayta, a prominent technology and gaming lawyer, agreed that the GOM's decision to seek legal opinion is a welcome move.

However, he lamented that the delay in finalizing the report has resulted in uncertainty for the sector.

He hoped that the GoM will take a decision soon and apply the tax on GRR as is being done in most international markets.