28% GST imposition triggered job losses, drying up of capital in India's real-money gaming sector: EY report

The 28 percent GST on skill-based online games resulted in funding constraints, reduced growth trajectories, job losses, and heightened uncertainty across the sector, according to a joint report by Ernst and Young (EY) and the US-India Strategic Partnership Forum (USISPF). 

Of 12 companies surveyed 10 faced significant headwinds on employment creation. Four companies ceased hiring but did not lay off any employees, while one-third of the companies laid off around 50 percent of their workforce. One company laid off over 50 percent of its workforce, while another shut down its operations. 

“For a sector which has created 1,00,000 jobs and was expected to create around three times more jobs in coming years, such job erosion is an alarming concern that reflects the adverse business impact of the GST amendment,” the report said. 

It added that the tax hike has also resulted in challenges such as talent retention and acquisition for companies, due to negative government sentiments towards the sector. 

According to the report, of the 12 companies surveyed only five recorded a growth in revenue. Before October 23, GST accounted for only 15 percent of the companys’ total revenue but after the said date seven of 12 firms decided to absorb the GST heat. Among the companies that decided to not pass the tax to the users, four organisations recorded a 50-100 percent jump in GST share while for other three early-stage companies for whom net deposits are negative, GST cost surged over 100 percent of the revenue. 

The new GST regime which was implemented on October 1, 2023, has led to a significant rise in the tax outflow of companies, increasing by as much as 350 to 400 percent, according to media reports. Many firms are currently absorbing the additional tax burden instead of passing it on to the consumers in order to avoid a potential churn in their respective userbases. 

The report also suggests that, among 12 companies, four were unable to attract capital and will move out of the sector if taxes are not normalised. Three firms are bleeding equity capital, and the next round of capital raising looks difficult for them and the firms are looking for buyers. One firm, which was profitable before October 1, 2023, turned into a loss-making entity. Two companies, which were highly profitable before the tax imposition is only making recording profits with slim margins.