The GST Council’s announcement of 28 per cent GST on the amount wagered or deposited for all online or offline gaming or gambling, has led to loud protests from the online gaming and gambling industry. But the issue of the horse racing industry has received little attention.
Horse racing needs to be separated from online gaming or gambling for clarity.
Horse racing has a physical form and viewed by spectators unlike online gaming. Today it operates in an organised environment with standards built up over many years and supervised within a structured format.
Much judgment is involved in picking a winner, where horse breeding, training, riding skills, form and chance play a role.
Wagering on races has a long history. So betting and horse racing complement each other.
As racing evolved so did the betting or wagering industry, which today offers much wider choice and sophisticated options. But today what has really enhanced the betting options and the supervision/control functions, is the explosion in computing capabilities and its related fields. The advent of powerful computing, online access and cashless payment systems, offers a transparent platform with no room for opacity.
The Tote
Horse race betting offers an elegant format called the Tote. Here the money collected or wagered in a race is pooled and paid out to the winners after deducting a fixed percentage for taxes and a fixed percentage for the club’s expenses.
The fewer the winning tickets the higher the odds or payout and vice versa. It’s an age-old system, but with today’s computing power it is real-time, versatile, scalable, a closed loop and not susceptible to leakages. The entire pooled amount is paid out as taxes, club expenses and to the winners, there is no residue. It cannot be manipulated.
The Tote combined with UPI and other cashless payment systems, can provide for a cashless betting platform.
All betting can be done online and payouts can also be online to the same account. This system ensures that all transactions and all relevant information are captured. The database will record the source and destination of funds and all values. This leaves little scope for the use of unaccounted money and money laundering. At all times there is a money trail with little scope for misuse.
Physical vs virtual
To clarify the difference between online betting on racing and online gambling, is that the former is based on a real physical event, while the later is based on a virtual event.
Gambling addiction is a major social evil. Punters betting beyond their means, leading to financial ruin is a very real problem. The solution suggested here is not perfect but the best available option. One, the access to betting is open only to people with higher income.
The most critical aspect is that tax rates must be kept low. The prevailing mindset of the lawmaker is that, horse racing being a pursuit of the rich, it must be taxed at the highest rate of 28 per cent. What needs to be appreciated is that betting is a repetitive action, not a onetime event. It is a transaction cost incurred with every transaction or bet.
A lower transaction cost will lead to higher volumes and higher tax revenues. A high transaction cost makes betting unviable for the punter and will lead to revenues dwindling, putting the survival of the entire racing industry at stake. Racing is dependant on revenues from betting.
With a high tax rate, the government also stands to lose on revenues. The method of application of tax seems to be swayed more by populist thinking than sound economic logic.
Racing is an expensive sport, apart from the thrill of winning, the only reason for a horse owner to buy and maintain a horse is the opportunity to earn prize money and get a return on investment. This prize money can only be provided by the club, if there is sufficient income earned from betting. Revenue from betting is needed to sustain horse racing. So the clubs’ take must be kept at a low fixed percentage, to keep the transactions costs low.
Supporting livelihoods
Horse racing supports livelihoods in the areas of breeding, training, actual racing, racing administration, feed suppliers, vet services and much more. The race courses also create a green lung in the cities which are in serious short supply and also provide for an alternative form of entertainment.
Taking all this into account and most importantly to consider it as a transaction tax, the GST needs to be fixed at low level, possibly 5 per cent for a single race bet and 12 per cent for a multiple race bet, with no Input Tax Credit. The tax will be on the amount wagered.
The Jackpot, Double, Treble etc could be considered multiple race bets. The clubs’ share could be 3 per cent. This rate of taxation will also boost government revenues, the clubs will be able to sustain their operations and the punters will have an reasonable transaction cost.
Also considering the substantial collections of GST that can accrue, the Finance Minister could decide that both winnings and losses need not reflect in the punters IT returns.
There is a need for the Finance Ministry to take a more liberal look at this issue. Based on the premise that lower tax rates can generate higher revenues, it can result in making all the stakeholders — the treasury, race clubs and the punters — happy.
The writer is a chartered accountant