Pre-GST boom, post-GST gloom: Online gaming stumbles in India

The gaming sector in India was once a sunrise sector that was experiencing an exponential revenue growth where some of the companies had growth rates as high as ranging between 100-200% prior to 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.

Out of the 12 companies surveye in the report 'Impact of New GST Law On Skill-Based Online Games', a joint report by EY and the U.S.-India Strategic Partnership Forum (USISPF), only five companies were able to record revenue growth since the GST amendment whereas seven companies had either recorded degrowth or had to face stagnant revenues. In case of degrowth, the decline is as high as up to 50% for two companies. Such decline in revenue growth stands in contrast for an industry which was recording exponential growth rates.

Prior to the amendment, GST accounted for around 15% of the online skill gaming companies’ revenue (net deposit). The increase in taxation has exerted a dual impact, dampening both growth prospects and profit margins within the industry. A substantial portion of the platform’s revenue is now consumed for absorbing the increased GST cost along with other expenses such as marketing, advertisement, technology, banking etc.

To facilitate a well-regulated skill-based online money gaming ecosystem in India, the report puts forth a GST recommendation that can be considered by policymakers for enabling a more conducive environment.

It is recommended that the policymakers amend the valuation mechanism for skill-based online money games to levy GST on Gross Gaming Revenue (GGR), which is the amount retained by online gaming platforms for operating a game, instead of “total deposits”.

Impact of new GST regime on employment

A huge impact on revenue is also reflected in job erosion. Out of the 12 companies, as many as 10 companies faced significant headwinds on employment creation. Four companies ceased hiring but did not lay off any employee. One-third of the companies laid off as many as up to 50% of their workforce. Also, one company had to lay off more than 50% of the people and one had to shut down their operations. For a sector which has created 100,000 jobs and was expected to create around three times more jobs in coming years,95 such job erosion is an alarming concern that reflects the adverse business impact of the GST amendment, the report points out.

Moreover, the tax hike has aggravated challenges in talent retention and acquisition, stemming from negative government sentiments towards the sector.96 Thus, the increased tax rate is resulting in reduction in employment prospects generated by the industry, which is further expected to worsen in the coming days as companies recalibrate their business plans and try to absorb their cost

Funding winter induced by the GST amendment

Prior to the amendment, GST accounted for around 15% of the online skill gaming companies’ revenue (net deposit). The increase in taxation has exerted a dual impact, dampening both growth prospects and profit margins within the industry. A substantial portion of the platform’s revenue is now consumed for absorbing the increased GST cost along with other expenses such as marketing, advertisement, technology, banking etc.

The current GST burden is not being passed on by the companies to the users due to the fear of loss of customer base as high tax burden is likely to disincentivize the players from playing games on the platform due to highly price elastic nature of the market.

Out of 12 companies, seven companies have decided not to pass on the cost to the users. For as many as four companies, the GST share has jumped to 50-100% of revenue (net deposit). Alarmingly, for three early-stage companies for whom net deposits are negative, the GST cost is over 100% of the revenue.

The passing on of the tax cost is also expected to drive the players towards offshore betting platforms, resulting in a loss of business for domestic companies and consolidation of small businesses.

Apart from layoffs, the high tax rate has significantly impacted investment in the industry. The industry has historically attracted substantial investor interest with investments worth INR 22,931 crore from both domestic and global sources between FY20 and December 2023.98 However, the recent years experienced a slowdown due to macroeconomic headwinds and changes in taxation. Out of the 12 companies, eight companies had raised funding until December 2022.

This funding ranged from US$0.5 million dollars to as high as more than US$400 million dollars. Since January 2023, only two companies have been able to raise funding. This coincides with the discussions about the need to re-look at the GST levied on online gaming and finally, the passing of the GST amendment

Such a manifold increase in GST has made Indian skillbased online money gaming business models unviable and drastically hurt investor sentiments. The industry experienced strong investor support and substantial funding from 2019 to 2022. However, there has been a significant drop in investor interest since January 2023.

From an FDI perspective, given India's distinctive demographics, spending patterns, and mobile-first consumption habits, skill-based online money gaming platforms are the primary revenue source and a significant growth driver for India's gaming sector, contributing to over 80% of the revenue and garnering predominant share of FDI. Alternative monetization models such as inapp purchases and advertising revenue yield lower returns in India than global averages.

According to the companies who participated in the survey, the best solution to the GST conundrum is to tax the sector on Net Deposits - which represents the actual revenue earned by the companies. Net Deposit is the actual amount that stays with the platform for the service they provide. Seven out of 12 companies advocate that the sector should be taxed on net deposits, out of which three recommend 28% GST on Net Deposit and four are in favor of 18% GST.