Investors to PM Modi: 28% GST on real-money gaming will lead to a $2.5 billion write-off

The real-money gaming segment accounted for 77 percent of India's gaming sector revenues in 2022 which stood at Rs 13,500 crore, as per a recent FICCI-EY report

A group of 30 prominent domestic and international startup investors, including Tiger Global, Peak XV Partners, and Steadview Capital wrote to Prime Minister Narendra Modi on July 21 to express their concern that the GST Council's recent decision to levy a 28 percent tax on the online real-money gaming sector could lead to a "potential write-off" of the $2.5 billion capital invested in the sector.

The investors said that the current GST proposal will set up the "most onerous tax regime for the gaming sector" across the world.

"This will also adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years and hence the growth of the gaming sector in India," the letter read. The decision will also "substantially and meaningfully erode investor confidence" in backing this or any other "sunrise sector" in the Indian tech ecosystem, it said. Moneycontrol has viewed a copy of the letter.

Investors claim that the decision has the "unintended consequence" of equating the "constitutionally protected legitimate online skill gaming industry with gambling, betting and other “games of chance.”

It also mentions that the council has changed the methodology of determining “value of supply” from the decade-old practice of charging service tax/GST on the gaming operator’s platform fee to a levy of GST on the “full value” that includes the player's contribution towards the prize pool.

"This will result in wholesale destruction of the sector, including for many MSMEs and startups, which may no longer be able to sustain their business operations and will shut down with immediate effect," the letter read.

Investors claimed that the move would result in a loss of "over 50,000 high-skilled jobs and a loss of livelihood opportunity for over one million Indian citizens who are indirectly associated with this industry"

Roughly $1 billion spent by the sector on advertisements would also be wiped off leading to a cascading adverse impact on the larger media and entertainment industry, they warned in the letter.

"We invested in this sector with the vision to make India the gaming capital of the world, which would help in generating, among other things, high-skilled jobs, billions in foreign capital and make the country a net exporter of innovation in gaming and allied areas such as animation, artificial intelligence and visual effects," the letter further added.

It's worth noting that Tiger Global is an investor in Games24x7, a skill-based gaming unicorn, while Peak XV has previously backed Mobile Premier League (MPL), a real-money gaming unicorn. Additionally, Steadview Capital is an investor in Dream11, a fantasy sports major, and MPL's game development studio, Mayhem Studios.

Among the other investors who have signed the letter are Kalaari Capital, ChrysCapital, Orios Venture Partners, Lumikai, Kotak Private Equity, Malabar Investments, Smile Group, and Matrix Partners India.

International investors include Think Investments, Clairvest Group, Tribe Capital, DST Global, Alpha Wave Global, and RTP Global. The investors have now sought a brief meeting with the prime minister and relevant officials to discuss the matter in more detail.

The letter from investors comes on the heels of a group of around 130 real-money gaming startup founders, CEOs, and industry associations signing an open letter to the government. In the letter, they requested the government to reconsider the recent decision to levy 28 percent on the full value of pool deposit, Moneycontrol reported on July 15.

On July 11, the GST Council decided to impose the top GST slab of 28 percent on the full value of the money paid by users to play skill-based games in a uniform manner, with no distinction made between games of skill and chance. Gaming platforms currently pay an 18 percent GST on platform fees.

This decision, which came after years of deliberation, shocked the country's burgeoning real-money gaming industry. Several industry executives and associations have warned that this move will "wipe out the entire industry and lead to job losses". 

In the letter, the investors said that if the GST is levied on every contest played every time, with fully taxed winnings, the GST burden will increase by 1,100 percent.

"On account of taxation of redeployed player winnings, the same money will get taxed repeatedly resulting in a scenario where over 50-70% of every rupee will go towards GST, thereby making the online real money skill gaming business model unviable," it said.

The letter instead suggested that the government levy 28% GST on the platform fees or gross gaming revenue (GGR), which would result in a 55 percent increase in GST quantum.

"This would ensure that the Indian online gaming operators are able to survive and are able to be a key contributor to the Indian economy. In addition, such a suggestion of levying GST on GGR would be in line with internationally accepted and proven practices" it read.

These tax rates do not apply to free-to-play and paid video games in the country, wherein the 18 percent GST rate is already included in the app sales on Google Play and Apple App Store.

The real-money gaming segment accounted for 77 percent of India's gaming sector revenues in 2022 which stood at Rs 13,500 crore, as per a recent FICCI-EY report. These revenues are set to grow to Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, it said.