In-depth: Respite from retrospective taxation on the card for online real-money gaming industry amidst turmoil?

New Delhi: The sector of online gaming better known as real-money gaming has been on a rollercoaster ride for the past year, ever since the tax revision of 28% GST on full value was announced by the 51st GST council meeting in August 2023. Additionally, the sector has also seen a massive dip in investments ever since the announcement of the tax rate revision was made. 

The implementation of 28% GST on full value from October 1, 2023, was the start of a downhill journey for the online real-money gaming industry. 

“The show cause notices sent by the Directorate General of Goods and Service Tax Intelligence (DGGI) can not be paid even if all the companies within the sector liquify themselves since the claim amount is 10-20% higher than the revenue the companies generated in their lifecycle. India levies the highest taxation in this space globally. While most companies are absorbing the tax right now as soon as they push it to the consumers, they will lose their consumers to the offshore betting platforms that continue to operate unregulated and illegally within the country,” an industry expert told BestMediaInfo on the condition of anonymity.

Furthermore, quite a few online real-money gaming platforms had to lay off staffers post the announcement of GST revision including Mobile Premier League (MPL) and Hike-owned Rush Gaming Universe. 

The online gaming industry is one of the fastest-growing segments in India with a revenue growth of 22% from Rs 18,100 crore in 2022 to Rs 22,000 crore in 2023. The industry is further expected to grow at a compound annual growth rate (CAGR) of 21% Rs 38,800 crore by 2026, as per a report by EY-FICCI. The number of online gamers in India grew to 455 million gamers in 2023 and is expected to reach 491 million by 2024.   

Troublesome duo: Offshore betting platforms and high taxation

Offshore betting platforms have caused quite a stir in the industry. The companies that are registered with the government continue to be taxed at 28% GST on full value. However, the offshore betting entities continue to attract consumers with their banners of no tax, no GST and no TDS. Moreover, the regulated entities have cut down on their marketing spending to maintain profitable margins.  Despite operating illegally, offshore betting platforms continue to advertise freely within the country with out-of-home advertisements in Delhi and other metro cities. 

“Various ministries have blocked these offshore platforms and issued advisories to warn against their advertisements. Blocking is not fruitful as these operators crop up under new domain names. They have heavily invested in OOH advertising and advertising over social media. They claim to be GST-free and TDS-free, luring Indian consumers away from registered and legitimate Indian gaming companies,” Roland Landers, CEO, All India Gaming Federation (AIGF), stated.  

The offshore betting platforms have received approximately Rs 8,20,000 crore ($100 billion) from India and have been clocking growth of 20% per annum in the last three years of the pandemic. Despite regulatory restrictions, offshore betting platforms have been able to grow within India. Moreover, the Indian exchequer is losing out on approximately Rs 2,29,600 crore in GST. 

Additionally, the post-GST revenue comes in the form of tax deducted at source (TDS) and the Indian exchequer loses out on Rs 1,59,408 crore in taxes, making it a total of Rs 3,89,008 crore.  The loss in taxes is expected to grow to Rs 6,72,205 crore by 2026. 

Additionally, the high taxation rates have made it increasingly hard for companies to operate within the space. The EY-FICCI report states that the sunrise sector was experiencing exponential revenue growth where some of the companies had growth rates as high as ranging between 100-200% before October 2023. However, post the GST amendment in October 2023, there has been a reverse trend in the revenue growth of businesses which has declined over the last six months. 

“After the GST amendments, the gaming industry is facing unprecedented challenges. Companies are struggling to retain gamers, leading to widespread consolidation and pushing startups out of the ecosystem. Many startups have already shut down, laid off hundreds of employees, and are grappling with stagnant revenues,” Saumya Singh Rathore, co-founder, WinZO Games, highlighted.

An industry source claimed that the companies that have been hit the hardest are small pool games like chess, 8-ball pool, and car racing, where real money gaming is the only viable monetisation model for 600 million gamers. Under the new GST regime, after spending just 10 minutes playing up to five games, even players winning three games are losing money, rendering the business model unsustainable.

According to Landers, the imposition of GST has had a pronounced impact on our bottom line. The government has collected approximately 3500 crores between November and January, representing a staggering 475% increase. Consequently, the revenue of most companies has taken a hit of anywhere between 40-75%.

Industry experts believe that the situation requires a multi-pronged approach. The government should implement the 2023 amendment to the IT Rules and allow Self-Regulatory Bodies to verify legitimate skill-based games, creating a whitelist of registered Indian companies. 

With access to this list, advertising agencies and payment gateways will be aware of offshore games and not service them, leading to a halt in their illegal activities in India. Payment gateways, hosting providers, and ISPs should be able to ensure compliance by providing services only to operators within the whitelist. Financial penalties could be imposed on those continuing to service non-whitelisted operators. Additionally, stricter regulations are needed to deter illegal gambling and betting ads, including penalising those who advertise offshore operators.

Funding Winter bone-chilling for the industry

The industry attracted substantial investor interest with investments worth Rs 22,931 crore made from global as well as domestic investors before the GST revision. However, the scenario has changed post the announcement of 28% GST due to macroeconomic headwinds and changes in taxation. “The increased GST rates have undeniably tightened the financial environment for startups, leading to a cautious approach from venture capitalists. This change points out that the industry is quite vulnerable to regulatory changes and gives a new direction for looking at investment strategies and sectoral preferences. We see this period as an opportunity to identify resilient entrepreneurs who can navigate regulatory changes and emerge stronger,” said, Naman Jhawar, partner and head of India and SEA, Picus Capital

Sectors that present new technology and have the potential for growth and persistent adaptability are destined to draw a considerable part of the limelight. As the market adjusts, we anticipate a resurgence in venture capital investments, driven by innovative solutions and scalable business models. Despite the current obstacles the dimension of growth is predictive due to measures that have been taken and the strong company policy on inventions and meaningful growth,” Jhawar opined.

Since January of 2023, only two companies have successfully raised funds one of which was Mobile Premier League. “The sector, which absorbed 90% of the $3 billion foreign direct investment (FDI) in gaming, has seen a complete withdrawal of investments. Apart from a few large-scale operators, early-stage and upcoming companies face near-certain extinction. We have urged the government to recognise the differential impact of the new GST regime on various business models and adopt an approach that ensures the sector's viability and fosters growth," Rathore added.

Bye-bye retrospective taxation?

According to several media reports, the union Finance Ministry has proposed an amendment to the Central Goods and Services Tax (CGST) Act, 2017 by introducing a new section 11A in the legislation. The section empowers the central government to ‘not recover the GST not levied or short-levied as a result of general practice’. The proposal is expected to be a part of the agenda of the 53rd GST Council meeting on June 22 in New Delhi.

If the proposal is accepted, the retrospective taxation recovery can be halted thereby addressing the industry’s concerns over the ambiguous nature of the decision to levy 28% GST on the sector last year. The DGGI issued 71 show cause notices worth RS 1.12 lakh crore in financial years 2022-2023 and 2023-2024 for online gaming companies. 

“Our foremost expectation is relief on the retrospective taxation. We also remain hopeful that the GST Council will review the tax imposition of 28% on deposits and revise it to a lower rate, as well as revert the method of valuation to net deposits, i.e., on the gross gaming revenue,” Landers, added.