New Tax Guideline Implication on the Indian Gaming Industry
Is it a game over?
India’s online gaming platforms, buzzing with virtual adventures and thrilling experiences, have just been handed a hefty notice to pay approximately Rs 1 lakh crore in Goods and Service Tax (GST). It’s as if the taxman has stepped into the virtual world to collect the dues. However, digging deep, these notices are in line with the new GST guidelines announced by the finance ministry’s revenue department on 29th September.
Starting from October 1, 2023, the GST authorities imposed a 28% GST rate on online gaming activities, including fantasy sports, poker, and rummy, as well as horse racing and casinos. This is likely to impact India’s gaming industry which has boomed from $0.54 billion in FY2016 to $3.6 billion in FY22 with a potential to reach $8.6 billion in FY27.
The new GST guidelines will not only impact the big players in the gaming industry but also mid-size enterprises. This will have a significant impact on the gaming industry not only in terms of revenues but also in terms of sustaining employment, future growth potentials, and attracting investment.
What are the new GST guidelines?
Initially, games of chance and gambling had to deal with a high 28% GST on the bet amount, while games of skill had an 18% GST on the platform fee or earnings.
However, defining what makes a game a skill-based or chance-based game was a point of contention, leading to disputes and potential of profit on the gaming platform’s end on how they perceive both. This was a major pinpoint for the council, which after the new guidelines has become a breaking point for gaming enterprises.
With the new GST guidelines, there is no arbitrage opportunity left. For all forms of online gaming, the applicable 28% GST would be applicable on deposits made in wallets or the full value of bets placed at the entry-level from 1st October.
This applies to any online game involving money, regardless of whether it’s a game of skill or chance. Additionally, from 1st October, it has become mandatory for foreign gaming companies to register themselves in India.
While the impact on revenues is yet to come, these changes have resulted in online gaming platforms receiving tax evasion notices from the authorities.
For instance, Dream 11, Delta Corp, and GamesKraft received notices to pay GST worth Rs. 40,000 cr, Rs. 23,000 cr, and 21,000 cr, respectively with regards to paying 28% GST. While the GST council contests the earnings to be based on luck, these companies have claimed them to be based on players’ skills.
required. This will lead to the tax burden being transferred to players, discouraging them, and leading to a catastrophe for the gaming enterprises, and creating a question about their existence.
How will the GST impact the gaming industry in India?
While India’s gaming market is still in the adolescent stage, it has been thriving since the pandemic with the lockdown and restrictions. However, this trajectory could get a blow with the new GST implementation.
1. Impact on the existence of mid-enterprises and start-ups
In the last five years, India’s gaming sector has attracted $2.8 billion in investments. There are already three unicorns in this space including MPL ($2.5 billion), GAMES 24 Seven ($2.3 billion), and Dream11 ($8 billion).
However, how many more small and medium enterprises in the gaming space can get an opportunity to thrive post-new GST guidelines is a looming question.
Entrepreneurs and small to mid-size enterprises are vital for the economy and job creation. The new GST norms have already resulted in gaming companies being flagged red with receiving short tax notices which, in many cases, are worth half a company’s valuation.
This makes it difficult for gaming enterprises to remain in business for the foreseeable future while also hampering their revenues, cash flow, and funding potential.
2. Loss of interest from gaming users/players
In FY 2022, the gaming industry generated $159.3 billion in earnings with Indian gamers making a significant impact, contributing to 17% of global game downloads and spending an average of ₹1,700 on online games during this period.
The number of mobile gamers in India is also likely to reach the 700 million mark by 2025, up from 507 million in FY22. However, this can take a new turn as with the new GST rate, the burden of additional tax is likely to fall on users.
This can act as a major turn-off for them to participate in online gaming be it fantasy cricket or poker. Let’s take an example to understand the impact.
Suppose 4 players each contributed Rs 500 to a game, resulting in a total wager of Rs 2,000. After awarding Rs 800 as winnings, the company is required to pay 18% GST on the remaining Rs 1,200, which amounts to Rs 216.
On the other hand, a player will pay 18% of the platform fees charged. If it is 8% of the wager amount, the player owes Rs 72 in tax.
With the new regulations, a 28% tax is imposed on the player’s game deposit, for instance, Rs 500, which amounts to Rs 140. Additionally, the platform charges a 10% platform fee, which comes at Rs 50. So, the player’s total liability on a Rs 500 wager would be Rs 190 (Rs 140 as tax and Rs 50 as the platform fee).
This can act as a demotivation to utilise gaming platforms and is likely to have a huge impact on the gaming industry.
3. Employee layoffs
The Indian gaming industry also plays a significant role in the job market, directly employing approximately 50,000 individuals.
If the impact of 28% GST discourages users and the tax notices result in gaming platforms pulling the plug, the result would be layoff for numerous employees.
This has already started to manifest with MPL having already laid off almost 50% of its employees due to the feasibility of operations, restrictive cash flow, and inability to innovate and expand with the new guidelines.
The bottom line
Online gaming, unlike other offline sports such as derby or casinos, is not a luxury for players. A majority of players are low-ticket and usually from tier-2 and tier-3 cities, using gaming as a way to break from reality.
This has until now resulted well for gaming platforms and enterprises. However, if gaming platforms and the GST council do not find a middle ground for GST rates, this booming industry will face some boiling time in the coming years.
