We don't support landscape mode yet. Please go back to portrait mode for the best experience
The $3-billion Indian online gaming industry caught the eye of the world. But the 28 per cent GST on real-money gaming has brought its dream run to a screeching halt
Mumbai-based Aarush Ahuja (name changed) felt his world come crashing down when he saw news channels flashing the headline, ‘GST at 28 per cent on online gaming, horse racing, and casinos at full value’. The 34-year-old couldn’t process the development. He switched off the TV and went to his bedroom. The first thing he noticed was his trusted Sony PlayStation 2 that had started his gaming journey.
Ahuja had been obsessed with gaming since childhood, so much so that his parents would often worry. But Ahuja didn’t care; he continued to pursue his passion while balancing his studies. When the time came, he joined an engineering college.
But his heart was in gaming and he dropped out. Scouting for opportunities to pursue his passion, Ahuja came across the founder of an online gaming firm, who was impressed by his passion for gaming.
The founder decided to take a punt on Ahuja. Over the next five years, Ahuja was at the India-based gaming firm, often rubbing shoulders with the who’s who of the global gaming industry. Then the entrepreneurial bug bit him. In 2020, during the peak of the pandemic, he decided to strike out on his own—with his own online real-money gaming company.
The real impact of the tax will be felt in some time, [but] the industry would like to come to a middle ground with the government while advocating for a tax on gross gaming revenue
Trivikraman Thampy
Co-founder and CO-CEO
Games24x7
Boosted by the pandemic, like many other tech-enabled sectors, the industry was being billed as the next big thing; some even called it a sunrise sector. Ahuja’s venture, too, grew steadily; all the years of hard work seemed to be paying off. But it all came to naught on July 11, when the GST Council announced the highest tax slab of 28 per cent on all online real-money gaming. Though there had been talk of such a decision, once it was announced, Ahuja understood that there was no going back. Besides, the industry has also been hit by a slew of notices from the tax authorities, totalling an estimated Rs 1.5 lakh crore, per industry estimates.
Before we delve into the current crisis, let us find out how the online gaming industry became so big. According to a report by the eSports Players Welfare Association (EPWA) and Vinayaka Mission’s Law School (VMLS), the number of online gamers grew by 12 per cent to 507 million in FY22 from 450 million in FY21.
“Gaming [in India] has become a part of the mainstream and entertainment industry,” said Krafton India CEO Sean Hyunil Sohn at an event in August. Sohn, whose firm is behind the popular BattleGrounds Mobile India game, added that India has a unique advantage: online gaming is mostly mobile-driven, and since India started with mobile gaming, it knows how to cater to this segment.
Experts believe the proliferation of the internet, cheap data, and the thrust on local manufacturing of mobile phones have further bolstered the space. And India, with its large population of young people, has grown to become a leading market for online gaming. Games like rummy, poker and fantasy sports are among the most popular in the country. In fact, a report brought out by Deloitte along with industry body Federation of Indian Fantasy Sports (FIFS) earlier this year states the online gaming industry had grown to $2.6 billion in FY22 and was expected to reach $8.6 billion by FY27, growing at a CAGR of 27 per cent. It is seen to have grown to $3 billion already this year, per experts.
Meanwhile, Indian gaming firms had raised $2.8 billion from investors across the globe in the past five years, the report states, adding that the industry was estimated to have created more than 100,000 direct and indirect jobs by FY23. Plus, the space boasts of unicorns such as Dream11, co-founded by Harsh Jain and Bhavit Sheth; Mobile Premier League (MPL), co-founded by Sai Srinivas and Shubh Malhotra; and Games24x7, co-founded by Trivikraman Thampy and Bhavin Pandya. Meanwhile, Nazara Technologies, another gaming firm, made a stellar debut in the public markets in March 2021.
Smaller companies are putting their business plans on hold or shutting down altogether while bigger companies are trying to sustain... Investments in the sector have also been hit
Zerah Gonsalves
Ex-head, Esports Operations,
D11 Gaming; and Player Representative
EPWA
Perhaps that is why, despite not being as big a market as China ($45 billion in revenue in 2022, per Goldman Sachs) or the US ($54 billion in 2022, per the American Gaming Association), India is a significant player. The report by EPWA and VMLS notes that by 2025, the number of mobile gamers in India will cross 700 million from 507 million in FY22.
While stakeholders were excited about the prospects of this sector, the tax authorities were busy making their plans.
The online gaming industry had been grappling with the tax question for some time. Initially, games of chance and gambling were subject to 28 per cent GST on the bet value, while games of skill attracted GST at 18 per cent on the platform fee or gross gaming revenue (GGR). But experts note that the rate as well as value was always an area of debate. The industry had contended that it should be on the platform fee, which is globally accepted.
The definition of game of skill and game of chance was also a matter of contention and the earlier tax notices are believed to be a result of this. “The GST rate on the gaming industry has been a subject matter of debate considering an arbitrage of 18 per cent versus 28 per cent applicable on games of skill and chance, respectively. The classification of a game in terms of skill or luck or chance was too subjective and resulted in litigation,” notes Saurabh Agarwal, Tax Partner at consultancy EY.
What has shaken the industry is the decision to levy 28 per cent GST on deposits made in wallets or on the full face value of bets placed at the entry level for online gaming or in casinos (excluding winnings used to place further bets) from October 1. This would apply to any online game involving money irrespective of whether it is a game of skill or chance and has been notified by the Central Board of Indirect Taxes and Customs.
Given India’s status as a global IT powerhouse, achieving a 5-10 per cent global market share [in gaming] should be well within reach, unless hampered by excessive regulation
Amrit Kiran Singh
President
Skill Online Games Institute
“I have been in this industry for 17 years. After Covid-19, it felt like the golden era of the industry would start. But the way this GST has been implemented, it has changed everything, including our outlook for the future,” says an industry insider who declined to be named.
The impact is already visible. MPL said it is laying off nearly half its workforce. In an internal email, Co-founders Srinivas and Malhotra wrote that the new rules will increase the tax burden and thus it had to take “some very tough decisions”, adding that the burden will increase by “as much as 350-400 per cent”.
Most start-up entrepreneurs BT spoke to say the tax will make life difficult for the industry. “Overall, operations will not be feasible. The high tax burden will completely restrict cash flows, limiting a company’s ability to invest in research, innovation, expansion or survival,” says Mitesh Gangar, Co-founder and Director of fantasy gaming firm PlayerzPot.
Tax officials, however, maintain that their stance is clear: wherever money is involved in an online game, it is an actionable claim and 28 per cent GST has to be levied. This resonated in the decision taken by the GST Council, although in its later meeting it said GST would be levied only on the contest entry amount, excluding winnings. Any online game involving money—whether it is rummy, poker or fantasy sports—will be covered by the 28 per cent GST.
A roll-back of the tax is unlikely, the tax authorities have stressed, adding that online gaming involving money is a “social problem” akin to gambling and causes addiction. “There have been instances where people have not only accrued huge debts but have also died by suicide due to this. The GST Council took the decision based on a holistic view,” says a senior official. There is also a darker side to this. There have been instances where gaming firms have engaged agents in small towns where players may not have the means to make online payments. Tax officials say agents collect money on behalf of these firms and send the players a link to the game.
The Directorate General of GST Intelligence (DGGI) has set up a separate cell to monitor GST compliance of foreign online gaming firms.
There’s more pain for the sector. Tax authorities are further sharpening the focus on these firms after the Supreme Court stayed a Karnataka High Court order that quashed a GST demand of Rs 21,000-crore on online gaming firm Gameskraft—founded by Prithvi Singh, Deepak Singh, Rajkumar Taneja, and Sindhu Devi Jha. About 35-40 firms are being probed by the DGGI and sources say the Supreme Court ruling gives it the power to continue investigations, while probes against another 100 firms may be launched soon. Gameskraft declined to comment on BT’s queries.
Besides, notices amounting to nearly Rs 1.5 lakh crore are being sent to more firms, including one to Dream11. Its parent Sporta Technologies has filed a writ petition in the Bombay High Court challenging the notice. Lengthy court battles are expected in many of these cases and the industry is also awaiting the Supreme Court ruling in the Gameskraft case.
Many companies and tax experts are of the view that these cases may amount to retrospective taxation—an issue that was also raised by some states. However, Revenue Secretary Sanjay Malhotra said after the 52nd meeting of the GST Council, that the notices are not retrospective. “This was not retrospective in any way as this was the law earlier also. The law has not been amended in any way. The liabilities always existed as the money online games played with stakes were already attracting [28 per cent tax] by virtue of entry of betting and gambling. The Council has not decided anything for the past. It is a prospective legislation. Whatever was the law earlier, it was clarified to them that it is because of this that these notices have gone,” he said. All states will notify it effective October 1, he underscored.
Abhishek A. Rastogi, Founder of law firm Rastogi Chambers, who has previously argued such cases in the Punjab and Haryana High Court, says the Supreme Court stay on the Karnataka High Court ruling in the Gameskraft case will make the tax authorities active as it strengthens their stance. “They are likely to proceed with issuance of show-cause notices and recovery of taxes. There are a number of other cases and investigations related to GST on online gaming going on at different stages across the country,” he says.
Khushbu Trivedi, Associate Director at law firm Nangia Andersen LLP, says the taxability of online gaming is a matter of debate due to the complexity created from contrary deliberations by industry players and lawmakers. “The Finance Act, 2023, has introduced new provisions seeking to tax winnings from online games at 30 per cent and a corresponding withholding tax provision with a computation mechanism prescribed,” she notes.
The increase in GST could discourage players from subscribing to such gaming platforms, and that might impact the profitability of the industry and could make the sun set on this “sunrise” sector, she notes. (See box The GST Burden)
Meanwhile, online gaming unicorns are in wait-and-watch mode. Games24x7 Co-founder & Co-CEO Thampy says his firm is focussing on re-pivoting and rethinking. “Re-pivoting means studying and understanding using a data-centric approach while taking into account how players respond to this tax,” he says. According to a top executive at one of India’s leading gaming firms, who declined to be identified, India could see the number of real-money gamers fall by more than half from about 120 million at present.
“Smaller companies are putting their business plans on hold or shutting down while bigger companies are trying to sustain and see how they can mitigate the impact through measures such as layoffs. Investments in the sector have also been hit and [survival] in the short term has become a question,” says Zerah Gonsalves, former head of Esports Operations at the Bahrain-based D11 Gaming and Player Representative at EPWA. While some firms are working on strategies to retain players, others may diversify to sustain themselves, she adds.
Some firms are also thinking of shifting abroad. Ahuja, for instance, admits to actively looking out, adding that he is not sure if the government’s promise to review the situation six months later will change anything.
“Gaming is a borderless and innovation-driven business, and India currently holds a mere 1 per cent share of the global market. In contrast, the US and China contribute 23 and 25 per cent, respectively. Given India’s status as a global IT powerhouse, achieving a 5-10 per cent global market share should be well within reach, unless hampered by excessive regulation and over-taxation,” says Amrit Kiran Singh, President of Skill Online Games Institute, an industry initiative that aims to be the repository of all information related to the industry.
While the outcome is yet to be assessed, the stakeholders remain divided. Many experts believe the industry might meet the same fate as crypto assets, while others don’t think this is the end of the road. A Dream11 spokesperson says, “Today, India ranks among the world’s largest fantasy sports markets by user base and we are constantly innovating using technology to transform sports experiences for fans across India,” he says, adding that the industry’s potential and passionate fans are what keeps them optimistic.
Thampy of Games24x7 says the industry would like to come to a middle ground with the government while advocating for a tax on GGR.
But, tax authorities say it is the player who has to pay the GST, not the firm. “If they are still interested, they will surely take the burden and play,” says an official.
For Ahuja, the immediate future looks bleak. But it’s not certain yet if the sun has indeed set on this sector.
UI Developer : Pankaj Negi
Creative Producer : Raj Verma
Videos : Mohsin Shaikh