Ad budgets, in-game ads to take a hit: Online gaming brands on 28% GST

After the GST Council came up with new recommendations for the online gaming industry in India wherein Union Finance Minister Nirmala Sitharaman announced that 28% GST be levied on the total value of online gaming, horse racing, and casinos, online gaming platforms believe that this move is expected to create significant challenges for brands, marketers, and in-game advertising partnerships.

The implementation of the GST is projected to result in a drastic reduction in revenues, leading to lower collaboration rates and a halt in new investments for at least a year. While larger players in the industry may withstand the impact, smaller companies could face potential elimination. Ad budgets and the survival of brands and marketers are at stake due to this development, they added.

The government has also put an end to the conversations around the demand for a bifurcation between skill-based and chance-based games as it was announced that there will not be any differentiation between the two.

Meanwhile, industry experts voiced their dissatisfaction regarding the decision made by the GST Council.

Mitesh Gangar

Mitesh Gangar, Co-founder and Director of PlayerzPot, said that the gaming industry is almost a seven or eight-year-old industry now.

“There are many smaller ancillaries who are now dependent on this industry. Now if the users' interest is reduced, then automatically it will not only affect the industry but all the people who are dependent on this industry. So, there will be a huge impact in terms of jobs and in terms of promoting India as an online gaming hub. There would be many consequences of this,” he said.

Deepak Kumar

Deepak Kumar, Managing Partner, Dentsu Gaming, said that the gaming industry is still incubating. Of course, there have been some great sparks but there are larger set players who are yet to make the mark.

"With the great expectations and the momentum that was building, the recent announcement could come as a roadblock to serious gamers for whom it was also a source of income and especially for those creators who are about to launch their creations. There will be a visible impact on the company’s revenue projections/cash flow. From the ad industry's POV, this might impact the advertising spends," Kumar added.

Gangar agreed that this move will affect the overall financials and thereby the advertising budgets too.

He said that numerous auxiliary industries rely on online gaming companies, such as advertising agencies and platforms that have witnessed substantial investments.

“However, the current scenario necessitates a significant reduction in these investments. Companies are compelled to prioritise financial management and cash flow optimisation. So, the investment of such an amount would not be viable for any company,” Gangar said.

“It appears that we should now explore alternatives to individual player games where the winning amount would be very less. Instead, we should consider multiplayer games involving a minimum of 4-5 players per session. This way, the winner would receive a more substantial reward,” he added.

Gangar believes that the newly announced GST will pose a barrier to the brands and marketers who have been actively exploring in-game advertising partnerships and collaborations.

"Since the revenues will be drastically reduced, the collaborations would be at a much lower rate and no new investments would be soon at least for a year now. Big players in the industry might survive but the smaller companies would be wiped out due to this implementation," he added.

Regarding the impact on ad budgets, Gangar highlighted a few key points. "Firstly, the projected revenue for our company will likely decrease by approximately half, and it could potentially be even lower," he added.

Secondly, it is important for the government to provide assistance to online gaming platforms by understanding the unique nature of this industry. Comparing it to horse racing or casino models is inadequate because online gaming operates differently. To grasp the essence of online gaming, policymakers need to update outdated laws and align with the preferences of modern-day India and its people, he added.

On the other hand, Kumar said that it is too early to form an opinion if this move will pose a barrier to the brands and marketers who have been actively exploring in-game advertising.

"The real impact is yet to be seen but there is a greater possibility of reduced spending by gamers. Collaborations and partnerships could become a way to manage cost and expectations on both sides, creating improved packaging, and more value adds for in-app buying will help maintain interest. A consumer is always spoilt for choice and will opt for what suits them the best, off-shore online platforms are also equally popular and have deeper pockets to stay invested for a longer time," he added.

Roland Landers

Meanwhile, Roland Landers, CEO - The All India Gaming Federation (AIGF) said "We believe this decision by the GST Council ignores over 60 years of settled legal jurisprudence by lumping online skill gaming with gambling activities.”

He stated that this decision will potentially wipe out the entire Indian gaming industry and it will lead to lakhs of job losses. At this valuation of taxation, companies will be paying more in taxes than they will be generating in revenue. The only winners in this decision will prove to be illegal and anti-national offshore-based gambling and betting platforms, that have been providing services illegally in India.

Bhavin Pandya

Bhavin Pandya, Co-founder and Co-CEO, Games24x7, said, “We are deeply distressed with the GST Council’s decision to implement 28% GST on the Contest Entry Amount (CEA) as opposed to Gross Gaming Revenue, which is the international standard for the sector. The tax on CEA effectively creates a hostile environment for legitimate domestic platforms with an unrealistic tax burden and is counterintuitive to the measures that the government has taken to promote this sunrise sector.”

Furthermore, he added that imposing GST on CEA will render the legitimate online gaming industry unviable, effectively driving consumers towards offshore and illegal platforms that pay no taxes, resulting in loss of taxes and outflow of foreign exchange. Further, this will also lead to loss of employment for thousands working in this sector.

“This contradicts the government's efforts to promote a healthy domestic online gaming sector, as demonstrated in the MeitY's online gaming rules and the Finance Bill 2023 amendments to the Income Tax Act. We urge the government to reconsider this decision and work with the industry stakeholders to find a more suitable taxation model that supports sustainable growth for the industry,” Pandya stated.

In the aftermath of this move, a group of 100+ young Indian entrepreneurs and CEOs from India’s online gaming industry expressed their concerns over how the move will not only hamper the online gaming space in the country which employs over 1 million people, 500 million users, etc. but that the same will put kill 99% companies in less than 6 months.

In the letter titled “Death by a 1000 cuts”, the players from the Indian gaming Industry stated, “The proposal to charge GST on the entire Deposit Value, instead of the Platform Fee, will kill 99% of the Companies in the sector in less than six months. This will undo all the work done by the Central Government to support the industry and lead to a very large number of immediate job losses and business closures. Additionally, this announcement has immediately driven users to offshore gambling operators which is anticipated to only grow with time. This will ultimately lead to neither tax collection nor the growth of the industry.”

The letter also addressed and lauded the support and relentless efforts made in the gaming space by the Central Government in the past couple of years such as the formation of the Inter-Ministerial Task Force (IMTF), change in business allocation rules, notification of online gaming rules, creation of a central light-touch regulatory framework, clarity on direct tax (TDS) for Online Gaming etc.

As per the players, the GST Council’s recommendation will disproportionately increase the cost of each game for over 500 million users of Bharat, who are already required to pay 30% income tax on winnings. Therefore, bearing such a large increase in cost is highly unlikely which is why the users will eventually shift to black market operators to avoid the increase in playing costs and reduction in the winning pool, resulting in a proliferation of the underground black economy and numerous criminal activities.

On a concluding note, the entrepreneurs from AIGF, E-Gaming Federation, Ability Games, Baazi Games, Deltatech Gaming, etc. urged that an opportunity to discuss this representation in detail with the govt be granted at the earliest to allow the industry to compete on the world stage.

Info@BestMediaInfo.com