'Will set the real-money gaming industry back several years': Stakeholders after GST set at 28%

Real-money gaming segment accounted for 77 percent of India's gaming sector revenues in 2022 which stood at Rs 13,500 crore

The Goods and Services Tax (GST) Council's recommendation to levy a 28 percent tax on the full face value or entry fees of online real-money gaming is expected to set the industry's growth back by "several years" and result in a significant fall in the sector's revenues, say industry stakeholders.

It will also disproportionately impact smaller players, particularly startups and MSMEs (Micro, Small, and Medium Enterprises), they said.

On August 2, the GST Council decided to stick to its initial proposal of levying 28 percent on the full face value of real-money games, without distinguishing between games of skill and chance, despite suggestions from a handful of states to review it.

However, it offered a partial relief to these firms by recommending that the GST be levied on the total money deposited by users to play real-money games and not on every bet placed, to ensure that there is no repeat taxation. The council has also agreed to review the levy six months after implementation.

Finance minister Nirmala Sitharaman said the amendment to implement these taxes will likely be taken up in the ongoing Parliament session and they aim to bring it into effect from October 1, 2023.

In a joint statement, industry associations Federation of Indian Fantasy Sports (FIFS) and E-Gaming Federation (EGF) welcomed the recommendation, saying it would clarify and resolve the current uncertainty over the issue of repeat taxation.

They said the new tax framework will lead to a very "burdensome" 350 percent increase in GST but it will give companies a "fighting chance to innovate and rebuild the foundation of gaming in India"

These associations represent 50 skill-based gaming companies, including prominent ones such as fantasy sports major Dream11, online rummy platforms Games24x7, Junglee Games (Junglee Rummy), and Head Digital Works (A23).

Siddharth Sharma, SVP, Head Digital Works (A23), also said the proposal settles a "long standing need" of a stable taxation framework. However, he noted that the increased GST levy will shackle their and the industry's growth "for the foreseeable future, as they pivot their business models to adapt to the new tax regime"

That said, Jay Sayta, a technology and gaming lawyer, noted that that council did not clarify whether chips or deposits that are returned by the customer or withdrawn would be treated as a refund of goods and eligible for offset or credit of GST.

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

'Only established players can survive'

Many stakeholders however believe that the higher tax levy along with the recent TDS changes could have dire consequences for the smaller players in the sector.

"These businesses typically operate on slimmer profit margins and possess fewer resources when compared to their larger counterparts. The cumulative effect of these taxes could severely curtail their ability to maintain operations, invest in technological advancements, and provide enticing incentives to attract gamers" said Rohit Bansal, founder of Super4, a fantasy sports platform.

WinZO co-founder Saumya Singh Rathore mentioned that taxing GST on deposits rather than the platform commission charged by the companies will make the unit economics unviable. The increased tax burden will "solely encourage the rise of monopolistic play" she said.

Read: 28% GST levy will make Indian real-money gaming sector an 'unviable business model': IAMAI

Echoing a similar sentiment, skill gaming industry body All India Gaming Federation (AIGF) stated  that the substantial increase in tax liability will lead to the survival of only "established and well-entrenched" skill gaming companies.

These firms can tap into their existing cash reserves to 'scrape through' this change, although it will likely impact their revenues and valuations, it said.

AIGF claims to have over 150 members, including online gaming companies and game developers across all formats and genres. Some of its prominent members include Nazara Technologies, Mobile Premier League (MPL), Gameskraft, Head Digital Works (A23), and Zupee.

Skill-based gaming is currently among one of the few rare sectors in India's digital economy with multiple companies boasting of sizable profits.

Gameskraft posted a profit of Rs 937 crore on revenues of Rs 2,112 crore in FY22 while fantasy sports major Dream11 posted a net profit of Rs 142 crore on operating revenue of Rs 3,841 crore in the same period.

In a statement, AIGF expressed hope for a rethink after six months and a stable and progressive regime is proposed that would help in the growth of the industry.

AIGF also warned that the decision could result in illegal offshore gambling websites thriving in the country.

Read: Tax collections from online gaming may jump to Rs 20,000 cr in FY23-24: Revenue Secretary Sanjay Malhotra

Offshore gambling liable for GST

Revenue secretary Sanjay Malhotra however said they will be introducing a specific provision in the Integrated GST Act, 2017 that would state that registration will be required for those entities which are offshore and they will be liable to pay GST.

"Although there are provisions already existing in the IT Act but still as a matter of abundant precaution, we are saying that in case any of the laws including the provisions that we are introducing with respect to offshore are not followed, then we can use the provisions of the IT Act to get those sites blocked" he said on August 3.

Another concern is the government's intentions to pursue claims on retrospective dues.

On August 2, Malhotra stated during the press conference that the GST department has filed a special leave petition in the Supreme Court, challenging the Karnataka High Court's ruling that quashed the Rs 21,000 crore GST notice against Gameskraft in May 2023.

"We are in appeal and whatever is decided by the Supreme Court will prevail for the period till we have amended the law and issued the notifications" he said.

Only 31, Moneycontrol reported that The Directorate General of Goods and Services Tax Intelligence (DGGI) has recently sent show-cause notices to two online gaming companies for alleged tax evasion worth Rs 3,000 crore, which are on similar lines sent to Gameskraft.

"If the department is amending the law on a prospective basis, it is entirely irrational and illogical to pursue claims for retrospective dues for which there is currently no legal provision" Sayta said.

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