Game over for profits? Industry unplugs concerns over GST

In the recent GST Council Meeting, even though Finance Minister Nirmala Sitharaman clearly indicated that review of the 28% taxation on initial deposits for casinos and online gaming for was not on the agenda for the meeting, in the 51st GST Council meeting held in August 2023, it was decided that a review of the new taxation regime for online gaming and casinos will be done six months post its implementation.

Since the new tax regime was notified from 1st October, 2023, it has been over 8 months since it has been implemented. Even though discussion on the subject could not take place during the meeting, the industry is hopeful that a comprehensive review and discussion on the subject will take place in the next council meeting that is scheduled to take place in August-September 2024.

"As far as retrospective show cause notices to online gaming and casino companies are concerned, it is encouraging that the GST Council has recommended insertion of a new provision in the CGST and SGST Acts, i.e., Section 11A that would give power to the government, based on the recommendations of the council, to allow regularization of short or non-levy of GST if such tax was not being paid due to common trade practices," says Jay Sayta, Technology & Gaming Lawyer.

"Since the entire online gaming industry was paying tax only on Gross Gaming Revenue (GGR) or margins until 1st October, 2023 and it was a common trade practice, the amendment once passed by parliament and state legislatures, will potentially be a first step to enable the government to withdraw retrospective show cause notices issued to over 70 online gaming companies based on the erroneous computation of face value of each bet instead of the common trade practice of GGR," he adds.

Online Gaming a Winner's (and Loser's) Game?

Gautam Arjun, Co-Founder and CEO, ediiie says, "The recent revision in the Goods and Services Tax (GST) framework, shifting from an 18% tax on profits and commissions to a 28% tax on entry fees, might question the viability of the gaming industry. Previously, if 10 players joined a game by paying Rs 100 each, resulting in a total collection of Rs 1,000, and the winner took away ₹950, the company paid 18% GST on the remaining Rs 50, that is Rs 9."

He further adds, "With new regulation mandates, Rs 280 is paid upfront as GST, which is fundamentally altering this balance. Companies are now required to pay a huge amount in taxes, which might threaten the operation of small players and result in shutting down the company. The previous structure allowed the industry to flourish with a balanced approach to taxation that did not heavily burden the operators or the players. Additionally, many players are forced or now prefer to play on international platforms that have no structure or regulations or control abuse and/or control underage gaming, unlike the Indian IT Laws."

Arjun points out that it is crucial to recognize that with the increased taxation rate and its broad application, the industry could potentially see a contraction in the number of market participants, with only the largest players surviving. This could lead to a significant decrease in the winning pool, resulting in a lesser number of players participating. Such regulatory change necessitates a revaluation of the industry's economic model and could lead to a significant transformation in how online gaming operates in India.

This decision not only reshapes the financial dynamic of the gaming sector but can also push its sustainability and growth towards a significant challenge.

Investment Freeze, Job Losses, and Existential Threat

Ankur Gupta, Practice Leader - Indirect Tax at SW India shares, "This amendment has had profound consequences on the pay-to-play online gaming sector, disrupting revenue models and profit margins, and stalling Foreign Direct Investment (FDI). Based on a report issued by USISPF, since October 2023, no new capital has been raised in the sector, which had previously attracted $2.6 billion in FDI since 2019. The elevated GST has led to funding challenges, reduced growth, job losses, and heightened uncertainty, with casual games facing the brunt of the impact."

He adds, "The sector's viability is in jeopardy, with many companies experiencing stagnant or declining revenues. The Government should consider revising the GST valuation mechanism from the "full-face value of total deposits" to Gross Gaming Revenue (GGR)/platform fees or else reduce the tax bracket if the tax continues to be on deposits to mitigate the negative impact. The high tax regime may also drive customers towards offshore or illegitimate platforms, leading to significant revenue losses for the exchequer and increasing gambling addiction."

Cautious Optimism About India's GST

Kris Fernandez, Chief Marketing Officer, FOMO7 says, “As one of the law-abiding global iGaming players, we think that the GST Council's decision to impose a tax on gaming, horse racing, and casinos in India by 28% was made after much consideration of the implications. We appreciate this action as it shows careful thought and commitment to a fair and regulated gaming industry. This tax, in my opinion, will encourage transparency and ethical gaming practices. How this would benefit customers and industry players would only become clear with time."

"At FOMO7, we think that even though the government's decision to impose a 28% GST might cause some disagreements in the online gaming industry for the rising players and even customers, it comes after a great evaluation and we stand with the same." The proposed amendment might make the way smoother for the gaming industry." he states and adds, "We think the tax will facilitate easier traceability, transparency, and effective stakeholder monitoring. The current events haven't caused us to alter our marketing plans. However, in order to capture the audience's attention more effectively, marketing and advertising are more important. Before making any additional decisions, we will wait to see if there is a significant influence on this."