Online gaming industry has not just exploded in popularity in recent times, but its global revenue has overtaken the higher-profile film and sports market. The online gaming industry which so far has witnessed a meteoric rise on the back of the pandemic, perhaps met its worse fate.
Implementation of New Tax Policy
In the month of July 2023, the Central Government has sent shockwaves to India’s gaming industry with a tight slap of levying 28% Goods and Services Tax (GST) on online gaming, horse racing, and casinos. Even though Finance Minister Nirmala Sitharaman had tried to ease the situation by stating the decision was not intended to stifle the sector but rather addressed the “moral question” of not taxing it on par with essential commodities, the move created a whole new buzz in the ecosystem.
The implementation of the 28% GST rate means that users will have to pay INR 28 for every INR 100 spent on online games, regardless of whether they are skill-based or based on chance. There were mixed reactions from entire parts of the industry and the gaming companies were truly concerned about meeting their cost of business expansion plans.
The GST Council decided to levy this tax rate after considering the recommendations of a Group of Ministers (GoM) on taxation of online gaming, casinos, and horse racing. The GoM was constituted in December 2022 to examine the issues faced by the sector and suggest suitable measures. The GoM submitted its final report in August 2023, which proposed to amend the GST law to include online gaming and horse racing in Schedule III to be taxed as actionable claims.
Some of the online gaming companies have appealed to the government and the GST Council, urging them to impose an 18% GST rate instead of the recommended 28% put forth by the Group of Ministers.
Immediate Concerns
The new rules had been welcomed by the industry and the bodies alike. By accepting the move, All India Gaming Federation CEO Roland Landers said, “We believe this is a decisive first step for comprehensive regulation for online gaming and I will propel the industry to compete globally, as envisioned by the Prime Minister. These rules will go a long way in promoting consumer interest while helping the industry grow responsibly.”
Investors like Tiger Global, Alpha Wave Global, DST Global, TPG, Matrix Partners India and Steadview Capital hold stakes in Indian real-money gaming startups including Dream11, Games 24×7, Mobile Premier League (MPL) and Zupee.
Regardless of the prospects, the industry has been grappling with some complex challenges related to the regulatory framework. The announcement has triggered a barrage of reactions from all stakeholders. Some have also hailed it as a means to offer a level playing field between online gaming companies and traditional gaming companies. Meanwhile, the new 28% GST is also believed to limit the ability of players in the gaming industry to invest in new games and this will likely impact cash flow and potential expansion plans.
Stating this factual reasoning, investors had decided to write a letter to the Central Government sharing concerns on this high tax rate. The investors had cautioned the government, this steep tax could make the industry unviable, while disproportionately hurting small startups. They also demanded the government that GST be levied on the gross gaming revenue, which is the platform fee that the companies collect for facilitating the games, and not on the full face value, or the contest entry amount.
Asserting the tax levy plan has caused ‘shock and dismay,’ they added that it would “substantially and meaningfully erode investor confidence in the backing of this or any other sunrise sector in the Indian tech ecosystem.”
Investor In Frame
Apurv Modi, MD and Co-Founder of ATechnos Group, who is also an investor of the gaming platform GoGames, has commented on this, “The introduction of a 28% GST on online gaming platforms is a significant development, prompting a thorough assessment of its impact on our investments and the industry at large. We’re diligently analyzing the financial implications for our portfolio companies and the wider market, seeking insights from experts, associations, and government representatives.
“Simultaneously, we’re collaborating closely with our invested companies to gauge their financial health and devise strategies to mitigate the heightened tax burden. This could involve cost-cutting, diversifying revenue streams, and exploring regions with more favorable tax policies,” he added.
Referring to the strategies planned to face the future implications, he added, “We’ll keep a keen eye on consumer behavior and market trends to understand how this change may influence user engagement and spending habits. Moving forward, we’ll work in tandem with industry peers to collectively address this issue. This may include advocating for policy adjustments and active participation in industry discussions.”
Considering the long-run of the companies with such a tax slab, he shared, “Our primary objective remains securing the long-term sustainability and growth of our investments in the online gaming sector, even amidst challenging regulatory shifts. Through a proactive and objective approach, we aim to navigate this situation in a way that benefits both our portfolio companies and the broader industry.”
Feedbacks From Founders
According to data from Invest India, the national investment promotion agency, the Indian gaming sector has raised $2.8 billion from domestic and global investors in the past five years and the funding has increased nearly fivefold from 2019.
The Shark Tank India fame Ashneer Grover expressed his disappointment on this taxation policy and he asked the startup founders to join politics.
“It was good fun being part of the fantasy gaming industry, which stands murdered in the current times. The $10 billion down the drain in this monsoon. It is crucial for startup founders to actively engage in politics and ensure adequate representation, or this is going to be separate industry after industry,” Grover tweeted during the time the GST rate discussion flared up.
“The announcement by the GST Council, imposing a dual tax structure on the online gaming industry, is a potentially detrimental decision that could have dire consequences for the smaller players within the sector. While the intention behind the move might be rooted in boosting tax revenues and bringing about industry regulation. But for the smaller online gaming enterprises, the weight of this dual taxation could prove to be insurmountable,” stated the Super4’s Rohit Bansal.
Online gaming is still in a nascent industry but in the last 5 years it has attracted billions of dollars in investment.
Expressing concerns over the investor’s future motives, Soham Thacker of Gamerji, has opined that, “The fact that entities located outside India are providing online gaming services will also fall under GST is likely to affect the investors’ sentiments and their future fund raising efforts. While we are going to obey the law of the land, we feel that focusing on entering new international markets will serve as a good strategy to manage the impact of the GST levy.”
Even as the industry is still grappling with the new directive, one of the biggest worries is that the industry will see a steep decline in the number of players. As per a recent survey by EPWA more than 60% of the players said that they would refrain from playing online games due to the increased tax burden.
The backlash of increasing the tax levied on gaming companies go far beyond what meets the eye. It is not just a financial blow to a nascent and developing gaming industry, but a ruinous and irrevocable impact on fostering cutting-edge technological possibilities, user experience and consumer welfare, employment opportunities creation, incoming investments, and growth of the industry itself. This unevenness in the sector leaves a big question mark under the wider lens of the future.
