One nation, one tax at risk: Experts warn as SC ruling creates chaos for OTT, Gaming industry

A recent Supreme Court ruling on May 22 has triggered concerns of a looming taxation storm over India’s booming digital entertainment economy. By affirming the validity of dual taxation—allowing both the Centre and State governments to levy service tax and entertainment tax on television broadcasting—the apex court has opened the floodgates for a fragmented and possibly burdensome fiscal regime that may soon envelop OTT platforms and online gaming services.

In its decision in State of Kerala & Anr. vs Asianet Satellite Communications Ltd. & Anr., a bench comprising Justices BV Nagarathna and NK Singh invoked the “aspect theory,” enabling different levels of government to tax different dimensions of the same activity. While the ruling technically pertains to the pre-GST era, legal experts warn it sets a precedent that could dramatically alter the tax landscape for digital platforms.

“This judgment may embolden state governments to impose entertainment or luxury taxes on OTT and gaming platforms, despite the GST regime,” warned Ruby Singh Ahuja, Senior Partner at Karanjawala & Co. "OTT platforms have become the preferred mode of entertainment. Dual tax imposition could severely affect these sectors, especially as OTT has emerged as a vital substitute for the struggling film industry."

The Court’s interpretation of Entry 62 of the State List—as extending to digital entertainment—further broadens the scope for such state-level levies. Observers say this could undermine the uniformity that GST sought to bring through the promise of “One Nation, One Tax.”

Snigdhaneel Satpathy, Partner at Saraf and Partners, echoed similar concerns, noting that the court's endorsement of dual taxation could introduce a new era of regulatory and fiscal uncertainty.

"This decentralisation of tax authority, though legally sound, risks undermining the very spirit of GST—a reform built on the promise of ‘One Nation, One Tax,’" Satpathy said. "If each state begins to impose its own entertainment levies on digital services, we may find ourselves navigating a compliance maze that’s more binge-worthy than the content itself."

Satpathy warned that cash-strapped states might now be incentivised to introduce new forms of levies, such as entertainment taxes or welfare-oriented cesses on OTT subscriptions and gaming transactions.

The concern is not theoretical. Some states facing revenue pressures are already exploring alternate paths—such as regulatory cesses and welfare levies—that could skirt GST limitations and target digital entertainment.

“What began as a judgment about television may end up reshaping India’s digital economy,” Satpathy added. “In the long run, this could mean higher consumer prices, compliance nightmares, and increased legal uncertainty for investors.”

Even though the judgment is centered around a now-defunct tax regime, industry stakeholders fear it could pave the way for future interpretations that allow states greater leeway in taxing the digital economy.

Asish Philip, Partner at Lakshmikumaran & Sridharan, acknowledged that the direct impact may be confined to legacy cases, but the precedent set by reaffirming the “aspect theory” could be invoked in new tax regimes by both Centre and States.

While the GST regime was intended to harmonise India's indirect tax structure, this ruling reintroduces complexities from a federalist standpoint. "The GST framework was designed to simplify and harmonise taxation," said Philip. But this ruling revives the ghost of dual taxation, particularly for sectors like OTT and online gaming, which straddle both entertainment and service components."

Philip, however, emphasized that the ruling's direct applicability is largely confined to the pre-GST era. "The impact of this ruling should be limited to cases predating GST implementation, since the judgment hinges on the dual levies permissible under the older tax framework," he added.

Nonetheless, the broad legal reasoning adopted by the Court may be invoked in future disputes or legislative innovations, say observers. The concern now is less about retrospective taxes and more about the roadmap the ruling provides for future regulation and taxation.

One such example is the Karnataka Cine and Cultural Activists (Welfare) Act, 2024, which proposes a cess on various activities, including subscription fees for OTT platforms. Legal experts believe that such mechanisms, though not explicitly barred by GST provisions, could resurface through creative fiscal routes.

Shashi Mathews, Partner at IndusLaw, noted that the Supreme Court's interpretation of Entries 33 and 62 in the State List of the Constitution could embolden state governments.

"The Court observed that with advancements in technology, entertainment is no longer confined to physical venues. Telecasts on television, mobile, and digital platforms could now fall under the scope of entertainment, giving states an open hand to tax digital services as well," Mathews said.

India’s OTT market is projected to reach $7 billion by 2030, while its gaming industry is growing at a CAGR of over 20%. Both sectors are vulnerable to unpredictable taxation, especially if state-specific levies proliferate.

"The long-term impact on the entertainment industry will depend on how policymakers balance fiscal autonomy with regulatory harmony," said Satpathy. "For now, businesses must brace for complexity—and perhaps, a few plot twists."

Experts warn that if states move ahead with entertainment cesses, it could increase operational costs, push up consumer prices, and discourage new investments in digital entertainment.