Death By GST? Why Real-Money Gaming Startups Are Crying Havoc

The GST Council’s decision to levy a 28% GST on online gaming, along with casinos and horse racing, has left the startups operating in the sector in the lurch. Such is the fear that startups in the online gaming industry, particularly real-money gaming, once dubbed as the ‘sunrise sector’ of India, are now worried that the move will wipe out the entire industry.

However, these startups cannot claim that the GST Council’s decision came as a bolt out of the blue. The government had been looking at taxation for the industry for the last couple of years. Issues related to taxation on casinos, horse racing and online gaming have been under government discussion since 2021.

Following several rounds of consultation, the government largely came to a conclusion that 28% GST should be levied on online gaming including games , horse racing and casinos.

Commenting on the decision, Finance Minister Nirmala Sitharaman said, “The discussion also looked at what is skill-based and what is chance-based. Whatever be the decision on (what) each of the game is – either skill or chance-based, or being both or being neither – is not what we are looking at. We are purely looking at that which is being taxed.”

The government will also amend Schedule 3 of the GST Act to bring online gaming into the actionable claim list. So far, lottery, betting, and gambling were classified as actionable claims but not online gaming.

With this, the government has essentially equated online real-money gaming with gambling, despite the lobbying by the industry over the last couple of years to differentiate between games of skill and games of chance

So what exactly changes for the industry under the new tax regime?

Impact Of New GST Regime

The GST council decided that a uniform 28% tax would be levied on the full value of the bets placed in case of online gaming. Earlier, only 18% GST was applicable on the platform fee charged for games of skill.

For example, if a player is placing a bet of INR 100, a GST of INR 28 would be levied under the new tax regime. Earlier, 18% GST was levied on the platform fee for the same amount. The platform fee varies from 5%-20%. Even if the platform fee was 20%, the total GST would come to just INR 3.6 (18% of INR 20). Hence, the increase in GST would be around 1,000% under the new tax rules.

Moreover, as per the new rules released earlier this year, a player would need to pay 30% TDS on net winnings. Net winnings of an online gamer would be calculated by subtracting the sum of total deposits during the financial year and opening balance at the start of the year in the user account from the amount withdrawn during the year.

As such, startups are worried that users will altogether quit these platforms.

However, FM Sitharaman argued that while the government is not against the online gaming industry, the GST rates for it cannot be the same or less than that of essential goods. Besides, other concerns around the industry also seem to have guided the GST Council’s decision, sources told Inc42.

Concerns Around Real-Money Gaming

Firstly, the issue of addiction, which has led to loss of money and multiple suicide cases, have brought the industry under scrutiny.

Secondly, the real-money gaming sector was the leading offender in terms of violation of advertising guidelines in the financial year 2022-23 (FY23), as per the Advertising Standards Council of India (ASCI).

In December, it was announced that the Central Board of Indirect Taxes and Customs (CBIC) was investigating gaming companies for alleged GST evasion of nearly INR 23,000 Cr.

Amid taxation issues & lack of clarity on regulation, online gaming startups saw a massive decline in funding in 2022.

Together, they raised $349 Mn in 2022, which was 80% lower than the capital inflow of $1.74 Bn in 2021. While the sector started recovering slowly in the first half of 2023 in terms of funding, the industry worries the investors will further move away after the government’s latest move.

End Of Gaming Boom?

Fear has gripped the founders of real-money gaming startups following the decision of the GST Council to tax the industry at 28%. As a few industry executives told Inc42, the question is no longer about how the move will hurt the gaming industry. They believe that the 28% tax on full face value will simply make the industry ‘disappear’.

Industry associations and leading gaming startups used harsh words to describe their disappointment.

“The decision of imposing GST at 28% on the total value of bets, without considering whether the games require skill or are based on chance, has eliminated the differentiation between games of skill and chance in the context of online gaming,” said Roma Priya, founder of Burgeon Law.

She added the government is treating online skill gaming equivalent to gambling, which goes against the legal precedents. Taxing the entire value of bets will negatively impact customers, as they will receive less playable value.

Moreover, as per industry estimates, there will be at least a 60% decline in the number of players on such platforms once the GST Act is amended and becomes effective.

Over the last couple of years, a number of smaller startups have also entered the ecosystem, besides unicorns such as MPL, Dream11, Games24X7. According to industry sources, many of these smaller startups will have to shut their shops as users will move away.

In addition to that, the industry fears that the decision will drive consumers towards offshore and illegal platforms that pay no taxes, resulting in loss of taxes and capital outflow at a time when the government is trying to curb the menace of illegal betting and gambling apps.

“This is an extremely unfortunate decision as charging a 28% tax on full face value will lead to a nearly 1000% increase in taxation and prove catastrophic for the industry. A tax burden where taxes exceed revenues will not only make the online gaming industry unviable but also boost black-market operators at the expense of legitimate tax-paying players, further undermining the industry’s image and capacity to survive,” Malay Kumar Shukla, secretary of E-Gaming Federation, said.

He also believes it will lead to loss of employment opportunities and losses for marquee investors.

The blow comes at a time when larger gaming startups are already struggling with losses.

The Singapore-based parent entity of MPL (Mobile Premier League) reported a 3X surge in its loss to $149.3 Mn in FY22 from $48.3 Mn in FY21.

Mumbai-based gaming platform Games24x7 also slipped into the red in FY22, reporting a loss of INR 230 Cr. Meanwhile, fantasy gaming unicorn Dream11’s net profit fell 56.59% to INR 141.97 Cr in FY22 from INR 327.1 Cr in FY21 on the back of a sharp jump in its expenses.

India’s gaming market size was estimated to be around $2.6 Bn in FY22 and predicted to reach a size of $8.6 Bn by FY27, according to a report by Lumikai. The number of gamers in India stood at 507 Mn in FY22, growing at a CAGR of 12% from 450 Mn in FY21.

With real-money gaming brought under 28% tax rate, there could be a pivot to token-based models or other in-app virtual currency. However, it’s not clear yet if the tax will be applied to all in-app purchases in online games.

Will GST be applicable on in-app purchases in gaming apps? We don’t know yet as it is usually covered by the GST charged by app stores on purchases.

The gaming industry would hope that along with clarity on taxation, the government also retreats on its decision of levying 28% GST on all online games. At the moment though, the gaming sector is more or less tense about the impact this will have on unit economics at a time when funding has slowed down for startups facing such issues.