Will 28 percent GST kill the online gaming industry?

The government's announcement creates a hostile environment and will boost black-market operators at the expense of legitimate players, say industry insiders

By Naini Thaker Forbes India Staff

Published: Jul 12, 2023 01:20:17 PM IST

Updated: Jul 12, 2023 01:39:24 PM IST

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FM Nirmala Sitharaman announced that online gaming, casinos and horse racing will be taxed at a uniform rate of 28 percent; Image: Shutterstock

On Tuesday, during the 50th GST Council meeting, Finance Minister Nirmala Sitharaman announced that online gaming, casinos and horse racing will be taxed at a uniform rate of 28 percent. The tax will be applicable on the face value of bets placed (in case of online gaming and horse racing) and chips purchased (for casinos), with no distinction between games of skill and chance.

“The GST Council’s intention is not to hurt the online gaming industry or states with casinos. A few states shared their concerns. But there is a moral question: Can we encourage them more than essential goods? I am proud to say that the GST Council discussed and understood the matter deeply and took a decision which had been pending for 2-3 years. The issue is very complex,” Sitharaman said.

As expected, the industry is disappointed with this decision. Shares of digital gaming and esports company Nazara Technologies dropped by over 14 percent and Delta Corp’s shares fell by 10 percent after this announcement.

Online gaming companies clocked a turnover of Rs 13,500 crore in 2022, as per a report by Federation of Indian Chambers of Commerce & Industry and EY (April 2023). There were over 400 million online gamers in India, of which around 90-100 million played frequently. Real money gaming comprised 77 percent of the segment revenues. As per the report, the online gaming sector is expected to report a total revenue of Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, gross of taxes.

Also read: Dissecting India's gaming pie

So far, GST was charged on the platform fee, termed as Gross Gaming Revenue (GGR), which is the international standard for the sector. As per the latest announcement, 28 percent GST will be levied on the Contest Entry Amount (CEA), instead. “The tax on CEA effectively creates a hostile environment for legitimate domestic platforms with an unrealistic tax burden and is counterintuitive to the measures that the government has taken to promote this sunrise sector,” says Bhavin Pandya, co-founder and co-CEO, Games24x7.

Industry experts reckon that, with 28 percent, taxes are likely to exceed revenues. “Not only will it make the online gaming industry unviable, but also boost black-market operators at the expense of legitimate tax-paying players, further undermining the industry's image and capacity to survive,” says Malay Kumar Shukla, secretary, E-Gaming Federation. This change in policy will lead to the loss of employment for thousands working in the sector too.

“How can you pay 28 percent of your topline when your margins are between 10 percent and 15 percent? That means you’ll kill the whole industry and then it’s game over,” Harsh Jain, co-founder and CEO of Dream11 and Dream Sports had earlier told Forbes India.

Apart from the increase in GST, another pain point for the industry is games of skill and chance being treated under the same bracket. “The decision ignores over 60 years of settled legal jurisprudence and lumps online gaming with gambling activities,” says Roland Landers, CEO, All India Gaming Federation.

Additionally, there will be a severe impact on FDI as well. “This decision will have a chilling effect on the $2.5 billion of FDI already invested by investors and jeopardise potentially any further FDI in the sector,” says Joy Bhattacharjya, director-general, Federation of Indian Fantasy Sports (FIFS).

This development comes as a shock, since the industry was quite optimistic after developments like the amendments to the IT rules, and the implementation of TDS on net winnings. “All this will be moot if the industry is not supported by a progressive GST regime,” says Shukla.

Also read: Can the gatekeepers for online gaming help curb betting, gambling?

This will mean an amendment in the GST Act, so how this policy change will be incorporated in the law is yet to be seen. In the meantime, the industry is hoping that the government will reconsider its decision and find a more sustainable taxation model.