The recent imposition of a 28% GST on skill-based online gaming has sent shockwaves through the industry, tightening funding channels, stifling growth, causing job losses, and injecting heightened uncertainty.
Since October 2023, a uniform 28% GST has been imposed on the full value of bets placed for online games. Gaming companies, however, argue for the levy on Gross Gaming Revenue (GGR) instead.
A joint report by Ernst & Young (EY) and the US-India Strategic Partnership Forum (USISPF) highlights the profound challenges faced by India’s pay-to-play online skill gaming industry following this tax amendment. The report focuses on fantasy games, casual games, and card games.
Industry Impact
According to the report, since 2019, the Indian gaming sector has attracted $2.6 billion in FDI from domestic and global investors, with 90% directed toward the pay-to-play online gaming format. However, since the GST hike in October 2023, some companies have reported a complete withdrawal of global investors.
Before the amendment, GST accounted for 15.25% of revenue. Post-amendment, GST consumes 50-100% of the revenue for 33% of companies, even surpassing total revenue for startups. ‘These startups now have to operate at a loss,’ the report states.
Specific Challenges
Casual games are particularly affected, with the exponential GST increase threatening business viability. Over half of the sector’s enterprises face stagnant or shrinking revenues, with 25% experiencing growth declines of up to 50%. This marks a stark departure from previous growth rates of 100-200%.
Decreased margins due to increased GST have led to employee layoffs and a complete pause in hiring for specialist skills such as technology, product development, animation, and design. ‘Most companies have reported impacted jobs, including no hiring, layoffs, and shutting down operations altogether,’ the report notes.
Recommendations
The report recommends amending the valuation mechanism for online money games to levy GST on GGR/platform fees—the amount retained by gaming platforms—rather than the full-face value of total deposits.
Upcoming Review
A review of the levy may be discussed at the GST Council meeting on June 22, 2024, but no final decision has been made yet.
In October last year, GST authorities issued show-cause notices demanding up to ₹ 1 lakh crore from online gaming companies for tax evasion. This new GST regime has created concerns around the sector’s viability and is deterring the right talent from joining the workforce, further exacerbating the sector’s woes.
The gaming industry is anxiously awaiting the outcome of the upcoming GST Council meeting, hoping for a resolution that could revive the sector’s growth and stability.
