Online Gaming's GST Gamble: Expert Insights on 28% Tax Hike

The new 28% GST on online gaming has produced divided opinions about the industry’s future in India. Some experts condemn the GST hike, while others see it as boosting government revenues.

The Parliament’s new amendments in the Goods and Services Tax (GST) laws to levy a 28% tax on the face value of all bets made in online gaming, casinos, and horse racing destabilized the online gaming industry in the country. Further, the GST Council also agreed that there should be no distinction between a 'game of skill and a game of chance’.

The online gaming sector, worth Rs 13,500 crore, accounted for 77% of India’s gaming sector revenue in 2022. As per the FICCI-EY report, these revenues were expected to grow to Rs 16,700 crore and Rs 23,100 crore in 2023 and 2025 respectively. Revenue Secretary Sanjay Malhotra has predicted that the new levy would fetch an estimated additional revenue of Rs 20,000 crore to the government.

However, the new GST law to levy a 28% tax on the face value of online games curtailed the growth of the industry resulting in large-scale lay-offs and cost cuts in prominent companies operating in the sector.

Government's Motive to Impose 28% GST on Online Gaming
Impact on Online Gaming Companies
New GST Regulation’s Impact on Esports
Outlook for Online Gaming Industry in India

Government's Motive to Impose 28% GST on Online Gaming

StartupTalky spoke with several key figures in the online gaming industry regarding the government’s decision to increase the GST on Real Money Gaming (RMG). Most experts opine that this move is an effort to increase government revenue, while others think that this also carries an underlying motive of curbing the unregulated expansion of RMG in India.

Dr. Aruna Sharma, a policy advisor and practitioner development economist by profession and the former Secretary of the Ministry of Electronics and IT, Government of India, believes that the government’s decision to increase the GST on RMG is a complex one, and there are likely multiple factors at play.

“The online gaming industry is a growing sector, and it is a potential source of revenue for the government. The government’s decision to increase the GST on both games of skill and games of chance is primarily aimed at increasing government revenue. The state governments have supported this decision, as they believe that it will generate more revenue for them. The government has been facing a fiscal deficit for some time now, and it is looking for ways to raise revenue.”

Mr. Rohit Bansal, Founder, of Super 4, said, “It's a delicate balance between revenue generation and addressing the broader societal concerns associated with RMG, highlighting the government's efforts to strike equilibrium in a rapidly evolving industry.”

Mitesh Gangar, Co-Founder & Director, PlayerzPot commented, “A 28% GST on the entire face value of online gaming is poised to significantly impede the growth of the online gaming industry. Previously, companies were willing to take risks and invest substantial resources in their operations, but this new taxation scheme renders such endeavors unviable. It presents a series of challenges, including constraints on cash flow, which in turn limits a company's capacity to allocate funds towards research, innovation, expansion, and even its overall survival."

Impact on Online Gaming Companies

The GST hike has caused serious hindrances in the revenue and workforce of several companies including unicorns. Fantasy gaming platform Mobile Premier League (MPL) has laid 350 employees so far, citing additional tax burdens. Other smaller players in the industry are dealing with layoffs, shutdowns, and funding challenges amidst the 28% GST on online gaming at full face value.

It also has undoubtedly imposed an increased financial burden on the companies. The additional tax has led to higher entry fees and reduced prize pools, making it more expensive for players to participate in fantasy leagues. This has ultimately resulted in a decline in player engagement and overall revenue for us as a brand.

When asked about the impact of the new tax on the company's workforce, Bansal said, “To manage increased expenses resulting from higher GST rates, we have implemented cost-cutting measures. We have also made some operational adjustments, leading to shifts in workforce allocation, and job roles to optimize efficiency and reduce costs.”

Joy Bhattacharjya, Director General, Federation of India Fantasy Sports (FIFS) said that the decision would massively affect the $2.5 billion of Foreign Direct Investment (FDI) already invested and would jeopardize any further FDI in the industry.

Bhattacharjya also warned that this decision could result in users shifting towards unauthorized betting platforms, thereby posing a risk to users and causing a loss in government revenue.

Zacharias Tegefeldt, CEO and Co-founder, of TrophyRoom, while speaking about his company's strategy to maintain a strong presence in the market and ensure positive growth, said, “Consumers will surely be pickier about where to place their funds going forward. It puts an increased emphasis on customer experience, support, etc. It also likely means that operators that do something new and different may be looked at differently. If I pay more, I want to experience more, so there's an opportunity for companies like TrophyRoom, who focus a lot on product and gameplay innovation, to grab a larger piece of the market, by providing that extra spice to the experience. In a sense, it puts us in a rather unsuspected good position, since innovation and customer experience already make out the core pillars of our right to exist.”

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New GST Regulation’s Impact on Esports

However, when the 28% GST hike was announced, there were a lot of speculations about its impact on the esports industry as well. Clearing the confusion regarding whether the GST will have any sort of impact on the Esports or video gaming industry of the country, Mr. Vinod Tiwari, President, of the Esports Federation of India (ESFI) & acting Director General, of the Olympic Council of Asia states, “It is imperative to first understand that the 28% GST is going to apply to the iGaming sector, including Real Money Gaming (RMG), fantasy sports, teen patti, rummy, and poker which are categorized under gambling or betting in the rest of the world. Contrary to some media reports, this GST is neither applicable nor will it have any impact on the ‘Video Games’ or the Esports industry.”

“Esports has been officially recognized as a sport by the government which finally and thankfully distinguishes it from any activities like iGaming such as fantasy, teen patti, rummy, poker, betting, and gambling, among others. It will carry on being taxed the way it always has been. Theories of 'game of skill' and 'game of chance' which only exist in our country neither apply nor are relevant in the Esports ecosystem,” says Mr. Tiwari.

In April of this year, the government made amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to lay out a comprehensive framework for the Online Gaming Ecosystem. According to Tiwari, instead of using the umbrella term of “online gaming”, the GST council should have ideally used the more specific term “iGaming’ which is known worldwide, or even “online real money game” which is defined in “The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules to avoid the confusion.

"We must acknowledge the TRUTH that the primary objective of the 400 million Indian video gamers (and approximately 3 billion gamers worldwide) is ‘purely entertainment’, and not financial gains or making money. It is regrettable that in India, our video games or esports industry is often unjustifiably associated with 'iGaming, betting, RMG, gambling, and many more, which creates unnecessary confusion and misperceptions," he adds.

Additionally, it is crucial to highlight that video game publishers have strict policies against implementing entry fees for any Esports events organized using their video games, further separating it from iGaming.

Gangar, when asked about the impact of the new GST on the willingness of aspiring entrepreneurs to enter this industry, said, “Aspiring entrepreneurs eyeing the online gaming sector will now think twice before venturing into it, primarily due to the burdensome GST. Consequently, the burgeoning gaming economy will face a substantial setback, resulting in economic strain, diminished job opportunities, and a stifled growth trajectory within the industry.”

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Outlook for Online Gaming Industry in India

Finance Minister Nirmala Sitharaman has targeted October 1 to roll out the tax along with an assured review of the levy six months after its implementation.

Tegefeldt said, “I hope for an amendment that addresses these quite serious issues. There needs to be a balance, which I don't think has been achieved yet. If this needed amendment happens, I think it's likely that the industry will see a rather quick dip, a new low, and then a resumption of growth after a while. If not, there are several different outcomes.”

On the other hand, being optimistic about growth in the industry, Bansal believes that trends like mobile gaming, localized content, and innovative gameplay are likely to drive expansion. He also shared that government regulations and consumer protection measures might become more stringent which in turn would affect the dynamics of the market. Collaboration between industry stakeholders and regulatory bodies will be pivotal for sustainable growth.

“Overall, the industry's future will depend on its ability to adapt to changing tax structures, navigate regulatory hurdles, and meet evolving consumer preferences,” Bansal added.

However, Dr Sharma thinks that the Indian gaming industry has a huge potential to thrive, and the new regulation would foster a suitable environment for its development.

She said, “The government’s decision to increase the GST on online gaming is not intended to discourage the development of the gaming industry in India. The government believes that the Indian gaming industry has the potential to become a major hub, and it has already taken steps to regulate the industry and create a favorable environment for its growth. The increase in GST is simply a way for the government to raise revenue, and it is not expected to have a significant impact on the industry.”

Tegefeldt, anticipating the future, said, “A brighter future, from where I'm sitting, is indeed one where the hungry underdogs that actually bring something new and fresh to the table, get increased attention from the players. It would be an incredibly cool thing if the faster, leaner, and more creative underdogs can put some pressure on the larger operators and lead the way to a more fun future in gaming.”

While it is still one month away from the implementation of the Act, it is too early to predict the outlook for the online gaming industry or iGaming in India. The RMG industry in India faces a mixed outlook due to the change in tax regulations. While increased taxation may present challenges for operators, the industry is expected to continue its growth trajectory as online gaming gains popularity.