India's real-money gaming sector battled a tumultuous 2023, facing a series of legal battles and regulatory headwinds that has even raised the question of viability for several companies in the fledgling sector.
The real-money gaming segment, which forms the bulk of revenues of the country's overall gaming industry, has seen a wave of layoffs and startups shutting down in the past few months as they try to grapple with the government's recently implemented 28 percent Goods and Services Tax (GST) tax regime.
MeitY's 2023 gaming rules
On January 2, 2023 the Ministry of Electronics and Information Technology (MeitY) released draft rules to regulate the sector. This move came just a week after MeitY was designated as the nodal ministry for all online gaming related matters.
On April 6, the ministry notified these amendments to the IT Act 2021 after holding a public consultation in January 2023 along with discussions with various stakeholders, including skill-based gaming companies, industry bodies, players, and lawyers, among others. These rules came amid unprecedented growth witnessed by the sector in terms of usage and revenues as a result of pandemic-induced home confinement in recent years.
As per these amendments, MeitY would allow multiple self-regulatory organisations (SROs) to determine whether a real-money game is permissible in India or not. In the beginning, the government had announced plans to notify three SROs with more expected to be notified later. That said, the ministry is yet to notify SROs for the sector, despite receiving multiple applications from multiple industry associations.
"The amended IT Rules by MeitY were a positive move toward establishing a robust framework for fostering responsible gaming in the country. A carefully considered regulatory framework has the potential to substantially strengthen the legitimate online skill gaming industry by distinguishing between genuine and illegitimate operators, with a primary focus on safety and consumer protection" said Saroj Panigrahi, Chief Operating Officer of skill gaming unicorn Games 24x7.
Several gaming startup founders and industry associations had also previously hailed these regulations, terming them as a "watershed moment for the industry". These rules provide the much-needed regulatory clarity and pave the way to accelerate growth in the sector, industry stakeholders told Moneycontrol in April.
The government also introduced TDS-related changes including removing the Rs 10,000 threshold for winnings and introducing a new mechanism to calculate TDS on net winnings. Net winnings are calculated by subtracting the total withdrawals in the financial year from the sum of total deposits made in the financial year, the amount already subjected to TDS during the ongoing financial year, and the opening deposit balance as of April 1 of the current financial year.
The industry's buoyant hopes for a thriving future in the country, however, soon suffered a severe blow with the GST Council's decision to levy a 28 percent tax on real-money games.
The GST gut punch
In July 2023, 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 real-money games, also known as the contest entry amount (CEA), in a uniform manner with no distinction made between games of skill and chance.
Prior to this, online gaming platforms paid 18 percent GST on the platform fees, also known as Gross Gaming Revenue (GGR). Platform fee is the commission levied by these operators from players for allowing them to participate in a game on their platform.
This recommendation, which came after years of deliberation, shocked the country's real-money gaming industry that was anticipating a higher tax rate on the platform fees it earns from players. It immediately witnessed a massive pushback from various stakeholders in the industry including prominent skill-based gaming firms, industry associations and investors who urged the government for a "viable and progressive GST regime".
Read: Explained: GST Council’s 28% tax on India’s real-money gaming sector
Many industry executives warned that the new GST levy could lead to an over 1,000 percent increase in the company's tax burden, which would lead to the wipe-out of the entire industry.
In a letter to Prime Minister Narendra Modi in July, about 30 domestic and international startup investors stated that the GST proposal would create the "most onerous tax regime for the gaming sector" in the world. They warned that it could lead to a "potential write-off" of the $2.5 billion capital invested in the sector and adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years.
On August 2, the GST Council stuck to its initial proposal of levying 28 percent GST on the full face value, irrespective of whether it is a game of skill or chance. However, it provided partial relief by recommending that GST be levied on player deposits instead of every bet placed, in order to avoid repeat taxation.
The council also agreed to review this decision six months after implementation. The new GST regime became effective from October 1, 2023.
These rates do not apply to free-to-play and paid video games in the country, since they don't involve a staking or a wagering element. They are taxed at 18 percent GST rate which is already included in the app sales on Google Play Store and Apple App Store.
Read:'Will set the real-money gaming industry back several years': Stakeholders after GST set at 28%
"The impact of the 28 percent GST has been substantial, influencing the financial landscape for both operators and consumers," said Sunil Yadav, CEO of PlayerzPot, an online fantasy and real-money casual gaming startup.
The government is expecting a 10-fold increase in tax collection from the real-money gaming sector in FY24. In a recent interview with Moneycontrol, Revenue Secretary, Sanjay Malhotra, said that the tax collection from the sector may jump to Rs 20,000 crore from Rs 1,700 crore in FY22.
There is also a moral angle to these moves, since it could appease concerns from central and multiple state governments over addiction, debt, and suicides, driven by losses in real-money games in recent years.
"Government believes social as well as economic purposes will be served as people will indulge in more productive activities if revenues (of real-money gaming companies) fall due to the new 28 percent tax. If demand is highly elastic, and revenues go down substantially, then a social purpose is at least served," Malhotra recently told Reuters.
To make matters worse for the industry, Indian authorities have also served retrospective tax notices to a slew of skill-based gaming firms such as Dream Sports, Gameskraft, Games 24x7, Delta Corp's Deltatech Gaming, and Head Digital Works (A23) for alleged tax evasion to the tune of over Rs 1 lakh crore.
Read: Death knell, fight for survival: Retrospective tax haunts India’s real-money gaming sector
About 71 show-cause notices have been sent for alleged GST evasion worth Rs 1.12 lakh crore in 2022-23, and in the first seven months of 2023-24, Minister of State for Finance Pankaj Chaudhary, said in the Rajya Sabha on December 5.
Many of these companies have independently challenged these notices in various state high courts and the Supreme Court with mixed results. In the past month, Delta Corp's Deltatech Gaming has received interim relief from Calcutta HC while Pacific Gaming and Playerzpot have received similar relief from Karnataka HC and Bombay HC respectively.
Dream Sports had also filed a writ petition in the Bombay High Court in September 2023 but later withdrew it in December 2023 with plans to challenge the show-cause notice at an appropriate forum.
That said, the Supreme Court refused to grant interim relief against GST demand notices to Games 24x7 and Head Digital Works on December 15. In September 2023, the Supreme Court also stayed a Karnataka High Court judgement from May 2023 that quashed a GST notice against Gameskraft for alleged tax evasion to the tune of Rs 21,000 crore. The case is set to be heard again in the coming weeks.
Industry executives and legal experts have previously told Moneycontrol that any unfavourable ruling from the apex court could be the final nail in the coffin for the skill-based gaming industry.
How are companies adapting to these changes?
Several platforms including Dream11, Gameskraft's RummyCulture, Mobile Premier League (MPL), and Games24x7's RummyCircle are currently absorbing the additional tax burden without passing it on to the players, in a bid to avoid the potential user churn.
However, this measure comes at the cost of profitability as many companies will likely see their operating profits plummet by 50 percent to 70 percent this year, industry sources tell Moneycontrol. Some firms may even post significant losses, they said. Revenues of these platforms are also expected to see a drop of 40-50 percent this year.
Read: Investors to PM Modi: 28% GST on real-money gaming will lead to a $2.5 billion write-off
It's worth noting that skill-based gaming is currently one of the rare sectors in India's digital economy that has multiple companies with sizeable profits. Gameskraft currently leads the pack in terms of profits, with a total profit of Rs 1,061.86 crore on operating revenue of Rs 2,662.51 crore for the financial year FY23. Dream11 posted a net profit of Rs 142 crore on operating revenue of Rs 3,841 crore in FY22.
In a report released in November 2023, early-stage venture capital fund Lumikai said the real-money gaming sector has touched the $2 billion revenue mark in FY23, but future revenue growth will be muted due to recent taxation policies and industry consolidation. It estimates the sector to grow by a meagre 5 percent compound annual growth rate (CAGR) over the next five years to touch $2.4 billion by FY28.
This will result in the sector's contribution dropping to about 32 percent of the country's overall gaming market that is expected to touch an estimated $7.5 billion by FY28, from the current 64.5 percent share in FY23, as per the report. The Indian gaming industry clocked $3.1 billion revenue in FY23, registering a 19 percent growth from $2.6 billion in FY22.
Several firms are also prioritising cost-cutting measures to tackle the challenging unit economics. Companies such as MPL, Hike (Rush Gaming), and Spartan Poker have laid off employees to streamline costs in recent months while startups such as Fantok, Quizzy, One World Nation and MPL-backed Striker have either shut down or temporarily suspended their operations.
Many platforms are also evaluating various strategies to improve retention by encouraging players to park their deposits for a longer duration and increase user engagement so that they can keep reusing the money to play games. They are also experimenting with different contest formats that will allow more people to play the game at the same time.
Lower number of withdrawals would reduce the tax outflow and improve the company's unit economics since player winnings and platform fees do not attract any GST under the current regime. For instance, if a player reuses his deposits to play 4-5 games, the operator will have to pay GST only once at the time of deposit but will earn platform fees for each of the games played.
"User retention is something all online gaming platforms need to solve. The sector is also adjusting to the impact of taxation and GST announced by the government and is closely working with all stakeholders to bring a progressive regulatory framework that will support and catalyse its growth" said Deepak Gullapalli, founder of Head Digital Works, which is majority-owned by Canadian private equity firm Clairvest.
Gullapalli said that 2023 was a "highly productive year" for the company since they forayed into online poker in September and also experimented with "new game formats".
Startups such as WinZO also forayed into international markets such as Brazil in October 2023 to diversify their operations. At the time, Co-founder Paavan Nanda told Moneycontrol that the firm's global expansion was "accelerated on the backdrop of the GST related developments".
Read: Skill gaming unicorn MPL's global foray pays off; records 38% revenue from global markets in FY23
Panigrahi said the implementation of the "world's highest GST rates" has caused setbacks for the industry over several months. However, it has brought clarity to the taxation framework, offering businesses an opportunity to rebuild and reboot. "The upcoming year will be pivotal as operators come to terms with these changes" he said.
Meanwhile, Ankur Singh, Founder of skill-based gaming firm Witzeal Technologies, said the sector "has demonstrated resilience by embracing new technologies, navigating the challenges posed by the GST hike, and adapting to a shifting regulatory landscape this year".
What's in store in 2024?
As 2024 approaches, the real-money gaming sector stands at a critical juncture with its future growth hanging on the implementation of a comprehensive regulatory framework and the outcomes of the upcoming court rulings related to GST notices, the constitutional validity of state-level bans on real-money gaming formats and the role state governments have in regulating the sector, among others.
Roland Landers, the CEO of skill gaming industry body All India Gaming Federation (AIGF) said that the industry is anticipating the implementation of IT Rules for online games and the establishment of self-regulatory bodies for game verification.
"Additionally, a six-month review by the GST Council will assess the impact of the 28 percent GST rule, while hopes are high for the resolution of ongoing concerns surrounding retrospective taxation," Landers said.
Read: Google to allow real-money games on Play Store after implementation of gaming rules
Echoing a similar sentiment, Anuraag Saxena, CEO of E-Gaming Federation said, "the sector's immediate priority is the implementation of proposed IT rules by establishing the self-regulatory bodies with regulatory oversight. These regulations will be essential to creating a transparent and safe gaming ecosystem and maximising the industry's potential for greater economic benefits".
"We believe that there is a need for operational rules, redressal mechanisms, and institutional authorities for any set of policies to be put into practice," he said. E-Gaming Federation represents top rummy and poker operators in the country such as Games24x7, Head Digital Works, and Junglee Games.
Meanwhile, some others now appear to be in favour of a fresh look at regulating the sector.
Earlier this month, Dream Sports Co-founder Harsh Jain said that the emergence of a regulator like SEBI will be key for the growth of the real-money gaming sector, as it would provide clear guidelines on what companies are allowed and not allowed to do.
"Gaming will finally have a body, which can regulate what we can and cannot do in sports to help the sports fan engage with the game in an official manner and allow that to grow even further," he said. Jain also currently serves as the Chairperson of the premier industry body, Internet and Mobile Association of India (IAMAI), which represents over 550 Indian and multinational tech companies.
The government has recently formed an informal group of ministers (GoM), which includes Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, IT Minister Ashwini Vaishnaw and Information and Broadcasting Minister Anurag Thakur, to formulate a comprehensive regulatory framework for the sector, according to media reports.
Responsible gaming practices will also take centre stage for these platforms in 2024, industry stakeholders said.
"The need is to maintain the fairness and integrity of skill-based real money gaming, and the same can be ensured with RNG (Random Number Generator) certification and integration of fair gameplay mechanism," said Mayank Kumar, Co-founder of GetMega, a real-money gaming platform. A Random Number Generator (RNG) Certificate ensures that the numbers generated by the platform's algorithm are merely random numbers and there is no pattern in the generated numbers.
Landers also said gaming platforms will likely place a greater emphasis on age verification, responsible advertising, and enhanced player support in 2024.
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