Over Half Of Online Gaming Startups Saw Revenue Decline Post GST Hike: Report

More than 50% online gaming companies in India witnessed stagnant or declining revenues after the government last year imposed 28% goods and services tax (GST), according to a report released jointly by EY and US-India Strategic Partnership Forum (USISPF), based on the latter’s survey of 12 such companies.

Until last October, online gaming did not have a specific tax rate, and companies typically paid 18% GST on the platform fee or commission they took from the money pooled by users.

However, last year, the GST Council clarified that 28% GST would be charged on the entry fees paid by users, which significantly increased the tax outlay for gaming startups. The 28% tax is applicable on the full value of bets placed in online games, regardless of whether it involves games of skill or chance. 

Out of the 12 companies surveyed, only five companies were able to record revenue growth, while seven companies saw degrowth or had to face stagnant revenues, the report said. 

“In case of degrowth, the decline is as high as up to 50% for two companies. Such decline in revenue growth stands in contrast to an industry which was recording exponential growth rates,” it added.

Online gaming platforms have multiple revenue generating alternatives such as in-app purchases, in-game advertisements and subscription-based pay-to-play models. 

The report further said that the new GST amendment has caused a host of issues, including funding challenges, reduced growth, job losses and heightened sectoral uncertainty.

In fact, several companies have reported that investors backed out of potential deals due to these challenges. GST now consumes 50-100% of revenue for 33% of companies from around 15% in the previous tax regime, surpassing total revenue for some startups and forcing them to operate at a loss.

In terms of job displacement, as many as 10 of the 12 companies faced significant headwinds. Four companies ceased hiring but did not lay off any employees. One-third of the companies laid off as many as up to 50% of their workforce. Also, one company had to lay off more than 50% of the people and one had to shut down their operations. 

The report also suggests that, among 12 companies, four companies have not been able to attract capital and will move out of the sector if taxes are not normalised. Three companies are bleeding equity capital, the next round looks difficult for them, also they are looking for buyers. 

One company, which was profitable before October last year, turned into a loss making company. Two companies were highly profitable before the tax imposition but now they are making profits at a lower margin.

During FY23, the Indian gaming industry saw high growth, reaching 568 Mn gamers, with 25% being paying users, as per Lumikai’s report. This reflects a 12% increase in gamers and a strong 17% growth in paying users compared to FY22.

Several online gaming startups, including Gameskraft, Delta Corp and others received notices to pay INR 1.12 Lakh Cr GST, following which many have moved courts challenging the tax notices. 

Complicating matters is the fact that the tax is likely to be applied retrospectively in some cases, which would severely dent the finances of smaller online gaming companies.