New Delhi: The decision to impose 28 percent GST on the full-face value of bets placed in online gaming will potentially wipe out the domestic industry and lead to significant jobs loss as many companies will be forced to close down, industry experts have warned.
It will, they said, further encourage illegal offshore-based gambling.
The move had sent the stocks of listed gaming companies into a downward spiral, as shares of Nazara Technologies, Delta Corp, Zensar Technologies and OnMobile Global tumbled after the GST Council’s decision was announced Tuesday.
Currently, online gaming companies pay 18 percent tax on the platform fees, or Gross Gaming Revenue (GGR). However, with Tuesday’s decision, they will have to pay 28 percent tax on full face value or the entire amount that a player/user chooses to play with.
For example, if a user deposits Rs 100 with an online platform – this is the full face value. Of this amount, platforms usually charge 10-20 percent as platform fee, or service fee. On this service charge, platforms currently pays 18 percent tax, which comes to Rs 3.60.
Explaining this calculation, Kriti Singh, Chief of Staff and Lead Online Gaming at policy think-tank The Dialogue, told ThePrint: “While more clarity is awaited on how the GST will be applied at full face value, it is likely that under the proposed rate, the platforms will have to pay 28 percent GST on the Rs 100 deposited by the user which will amount to Rs 28. It is more than what they earn (Rs 20).”
While online players are now left with Rs 16.40 as cash flow, she said, cash flows will be in negative (-Rs 8) at 28 percent GST on full value.
“To cover this, they will have to double the platform fee significantly which will ultimately decrease the prize pool that the users will compete for…In order to sustain, this burden will be passed on to the consumers by increasing its platform fee and the fee percentage increase could depend on the business models,” Singh said.
The online gaming industry includes various formats, such as card-based games (rummy or poker), fantasy sports, competitive skill-based games (e-sports) and casual games (Chess, Ludo, Candy Crush, Temple Run etc).
Roland Landers, CEO at The All India Gaming Federation, has said the decision will “potentially wipe out the entire Indian gaming industry, with the GST liability increasing by at least 1100 percent, and will lead to lakhs of job losses.” “The only winners will prove to be illegal and anti-national offshore-based gambling and betting platforms that have been providing services illegally in India,” he said.
Replying to a question on whether this move could kill the online gaming industry, Finance Minister Nirmala Sitharaman said discussions were held on this aspect.
“Our agenda is not to kill an industry. All sorts of businesses have to be kept alive. Casinos in Goa and Sikkim yield a lot of revenue for the two small states… It is not so much our position, every state felt it,” she said, adding that the decision was made after extensive deliberations.
Industry and experts feel the decision, if implemented, will be a big blow to the industry as well as the users.
Deepro Guha, Senior Manager at The Quantum Hub, a public policy firm, told ThePrint that the revenues of online gaming companies are going to be hit and that there will be a lesser number of users wanting to engage in online gaming due to the cost increasing.
It appears that this GST change will not impact casual games wherein people make purchases within the game, he said. “However, the government press release is not very clear, and the wording of the official notification would provide further clarity.”
Pointing out that there are over 1,300 gaming startups in India, Aaditya Shah, COO at online gaming app IndiaPlays, said that imposing a 28 percent GST on anything other than platform’s gross revenue will have adverse consequences.
“It would be highly unjust to burden the industry with such a significant tax. Not only would this decision impede the industry’s progress, but it would also put millions of jobs at risk.”
Ankur Singh, founder-CEO at gaming firm Witzeal Technologies, added that if implemented as law, this decision would result in the closure of numerous gaming companies. “The consequences extend beyond the gaming industry and can potentially hinder foreign direct investment in new sectors, as investors may lose confidence in overall development of the sector.”
Industry body Internet and Mobile Association of India (IAMAI), too, said that the net effect of this levy will result in an approximate 1,000 percent GST increase and will cause irreversible damage to the USD 2.5 billion investments in the online gaming start-up ecosystem and lead to a complete halt on any prospective FDI. “It shall also serve as a huge blow to India’s ambitious target to achieve a $1 trillion digital economy by 2025,” it said.
“There is definitely going to be an impact at multiple levels — user base, revenues and investor sentiment — both for real money gaming (RMG) and non-RMG as no distinction has been made,” Gamerji founder-CEO Soham Thacker said.
For non-RMG companies like Gamerji, Thacker expects a slight impact on the subscription driven revenues. “Currently, we levy 18 percent GST on the total subscription cost which now goes up to 28 percent, making it more expensive for the users to get on the platform. In the short run, it is likely that some companies will absorb this impact to a large extent, thus taking a hit on revenues or they may consider increasing subscription cost.”
“Many gaming companies in order to limit the impact on the investors’ side, may choose to relocate business outside India…,” he added.
While there may be an initial increase in tax collection, Guha said, the user base is likely to shrink and some companies may choose not to offer services. As a result, he said, the overall taxable pool may shrink.
Also Read: New IT Rules give much-needed legal support to online gaming. But there’s more homework to do
‘No distinction made by govt’
Experts pointed out that the GST Council’s decision without distinguishing between games of skill and chance undermines the government’s previous steps such as clarification about TDS on wins.
“This move is in stark contrast with the efforts to recognise online skill gaming as a legitimate industry by classifying them as an intermediary under the amended IT Rules,” Singh said. “The government (had) recognised the distinction between online games of skill and betting or gambling, and (now) putting games of skill under the GST’s highest bracket along with casinos, lotteries, and other betting and gambling games goes against ethos of this distinction.”
If games of skill and chance are taxed equally, players will be incentivised to play games of chance as the first category is inherently more unpredictable and players have a better chance of winning by simply being lucky, gaming platform provider Kick Games Studios Pvt Ltd told The Print.
“This will have a negative impact on the growth and sustainability of the online gaming industry, as it will discourage players from playing games of skill, which are more skill-based.”
It added that taxing games of skill equally to games of chance is unfair as players of games of skill have to work harder and invest more time and effort to win.
IAMAI, too, pointed out that online gaming is distinct from gambling and betting. “Hence taxing India’s legitimate online gaming industry with gambling activities will not only massively dent the burgeoning online gaming sector, but will also threaten to make the entire $20 billion Indian online gaming sector an unviable business model.”
In India, betting comes under Schedule 7 of the Constitution — which divides powers between the State and Centre — with States having the power to regulate. So while many states have banned betting, it is allowed in a regulated manner in some like Sikkim and Goa.
According to Landers, the GST Council’s decision “ignores over 60 years of settled legal jurisprudence by lumping online skill gaming with gambling activities”.
While the industry is hopeful of the Council doing a rethink and taxing only the platform fee in line with global practice, Revenue Secretary Sanjay Malhotra has said amendments to enable the tax will be brought in Parliament, which meets this month.
IAMAI pointed out that the move will put Indian gaming companies at a significant disadvantage against offshore counterparts. “The new tax structure is contrary to global best practices, where GST on online gaming is levied on GGR/platform fee.”
The online gaming industry contributed more than Rs 2,200 crore of GST in 2022, according to an August 2022 report by Assocham and EY. Additionally, the winnings from the online games are taxable at 30 percent as per I-T laws.
The report noted that analysis of international laws of the various countries indicates that largely taxes (in the range of 6-21 percent) are levied on the platform fee/GGR earned by the gaming companies.
“The growth and contribution of this industry in India can only be made possible with the right taxation framework and regulatory support to the domestic market. Deviating from international best practices may not be fruitful to the stakeholders and only drive the domestic players away,” it said.
The Indian online gaming industry saw a tipping point during Covid, and grew from Rs 65 billion in 2019 to 135 billion in 2022, and is estimated to be a Rs 167 billion industry in 2023 and Rs 231 billion in 2025, as per a FICCI and EY report released in April 2023.
As per this report, there were over 400 million online gamers, of which around 90-100 million played frequently, and RMG comprised 77 percent of segment revenues. It also noted that online game viewing and streaming was emerging as an alternate entertainment option to OTT consumption and social media.
Singh, meanwhile, added that the GST increase on online gaming at par with betting and gambling, will have an adverse impact on societal perception as well as user protection.
Higher tax rates will deter consumers from utilising legitimate platforms and may push them to offshore platforms promoting betting and gambling. “This will pose higher financial and safety risks for consumers, in addition to the concerns around debt traps and suicides perpetuated due to these illegal platforms. The lack of distinction between online skill gaming and betting or gambling will further confuse the consumers to determine legitimate platforms from illegitimate,” The Dialogue member said.
(Edited by Tony Rai)
Also Read: Online Gaming KYC will not be Stricter than RBI Master Directions