The 28 per cent tax on real money gaming (RMG) imposed by the Goods and Services Tax (GST) Council came into full effect on 1 October 2023. Wasting no time, authorities have already sent tax notices to several start-ups in the sector.
The RMG segment seems to be in the middle of a storm that is unlikely to see calm shores soon. From layoffs to closures, several companies have taken drastic steps because of the change of taxation laws on online gaming, which now doesn’t differentiate between games of skill and games of chance.
The Directorate General of GST Intelligence (DGGI) has issued approximately 12 pre-show cause notices to online RMG firms, such as Dream11, Games 24x7, and Head Digital Works, pertaining to GST liabilities amounting to around Rs 55,000 crore. Among these, a whopping notice of over Rs 25,000 crore was sent to the fantasy sports platform Dream11, potentially making it the most significant indirect tax notice ever issued in India.
With the online gaming industry thrown into chaos, questions arise about what lies ahead for the start-ups in the sector. As per several experts, many will have to fight the battle for survival in the coming months as the government pushes ahead with its plan.
Chaos All Around
Super Group Limited (SGHC) stopped operating in the Indian market earlier this week following the implementation of new taxation laws. According to the company, the market is no longer commercially viable for Super Group.
In another development, Nazara Technologies received a Rs 2.83 crore tax demand notice from DGGI, joining the list of start-ups, which include Dream11, Games24x7, Gameskraft and Delta Corp.
The tax liability has forced some gaming companies to go on a drive to cut costs. Firms like Mobile Premier League (MPL), Hike and Spartan Poker have laid off around 600 employees in order to cut costs after the announcement.
With Super Group quitting business in India and a few smaller companies halting their operations, there is a general feeling that others may follow this lead.
Former secretary of the Ministry of Electronics and IT, Dr Aruna Sharma, who is now a policy advisor and practitioner development economist, states that the decision of whether or not to remain in the Indian market is a complex one and will depend on a number of factors, such as the company's profitability, the size and growth potential of the Indian market, the level of competition in the Indian market, the regulatory environment in India, and the level of risk associated with operating in India.
“Some companies may find that the 28 per cent GST is too high of a tax burden, and they may decide to exit the Indian market while other companies may be able to absorb a higher tax burden, or they may be able to pass it on to customers in the form of higher fees,” she adds.
India’s online gaming market saw significant growth in the last few years to reach a value of $2.6 billion in fiscal year 2022, according to a report by Lumikai. Other reports state that it has projected a compound annual growth rate (CAGR) of 27 per cent and can potentially surpass $8 billion in market size by the fiscal year 2027.
However, experts are concerned about the future of the online gaming industry in India. According to Jinesh Joshi, research analyst at Prabhudas Lilladher, start-ups will face a big challenge as the tax is on the complete face value, which will impact the survival of existing companies that are solely dependent on RMG. He also claims that it is quite possible that the top names might be able to survive while the smaller companies, which don’t have much access to capital, might face serious survival challenges.
The new rate can also act as a major setback for offshore companies as they will be required to register for GST and obtain a GSTIN (Goods and Services Tax Identification Number). Additionally, they must maintain precise records of all financial transactions and ensure timely filing of GST returns.
Losing Incentives
Apart from dealing with the ramifications of the new tax rate, companies are also facing the challenge of retaining players on their platforms. While this was already challenging with the mushrooming of several gaming apps, fragmenting the target audience, the new tax rate will further impact the winning amount of players.
Gaming companies will now face the challenge of ensuring that players have enough incentives to continue playing. Joshi explains that the 28 per cent tax can discourage many players. Why? Because if a player brings in Rs 100 as the betting money, 28 per cent is being taken away at the onset of the game as a tax.
Moreover, most firms charge a platform fee. So, in total, players will have to pay a platform fee, 28 per cent GST and a 30 per cent TDS on winnings under the new regime, narrowing their winnings. Earlier, they had to pay an 18 per cent tax on the difference in the amount wagered and total winnings and the TDS amount along with the platform fee.
“The only way operators can retain players is by offering them higher bonuses, discounts or by reducing platform fees, etc. However, in the current scenario, when the companies are themselves operating on thin margins, it will be difficult for them to manage,” he adds.
It is possible that to decrease their burden; some companies may pass the extra charges on to customers in the form of higher fees or lower winnings. However, this could make them less competitive in the market and decrease their user base. With companies caught between a rock and a hard place, the road ahead is expected to be bumpy.
What The Future Holds
In a conversation with Outlook Start-Up earlier, Malay Kumar Shukla, secretary of the e-Gaming Federation, stated that the government wants to protect the users of various online gaming platforms and ensure that only permitted games are allowed. He added that the sharp increase in GST is worrisome, and the government should levy it in a way that benefits both the players and the operators.
According to Dr Sharma, all payments for online gambling services are digital, which makes it easy for the government to track income and collect GST. This transparency is a positive development for the government while putting in place increased accountability and transparency in the transaction of incomes and payments of e-gaming companies.
She adds, “It is also important to note that the Indian government is currently reviewing the GST regulations after various industry stakeholders have filed legal complaints mentioning the imposition of such high taxes as arbitrary and contrary to law.”
With the current scenario where most of the online gaming companies seem upset with the taxation policies, it would be interesting to see how the growth curve of the sector evolves in the coming years.
According to L Badri Narayanan, executive partner at Lakshmikumaran & Sridharan Attorneys, the GST Council has not provided any respite for ongoing investigations and show cause notices issued under the previous regime.
“The revenue secretary reiterated the position that transactions being covered by the betting entry and tax is not retrospective. Companies have no option than to knock the doors of court on erroneous interpretation canvassed by the department,” he adds.
An April 2023 EY report on India’s media and entertainment sector projected that in the next three years, India’s online gaming industry is poised to grow at a CAGR of around 20 per cent. However, the new reality of a tough landscape is just settling in, and it remains to be seen how many start-ups will still be standing when the GST storm calms down. Will it be game-on or game-over?
