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Earlier today, investors in the Indian online gaming industry sent a letter to Prime Minister Narendra Modi regarding their concerns around the decision of the GST council to implement a 28 percent GST for the industry.
The letter, reviewed by Forbes India, states that decision has led to the “unintended consequence of equating the constitutionally protected legitimate online skill gaming industry with gambling and other ‘games of chance’".
The letter is signed by Indian and India-focused investment funds such as ChrysCapital, Kalaari Capital, Peak XV Partners (formerly Sequoia Capital India) as well as foreign investors including Tiger Global Management, Think Investments, Steadview Capital Management among many others.
The letter adds that skilled jobs, foreign investment and the hope to make the “country a net exporter of innovation in gaming" are likely to be affected. Currently, online gaming (skill-based) is $2.9 billion (as of 2022) in terms of revenue and the letter states that the 400 real money gaming startups have also attracted $2.5 billion in global funding. The industry warns that if the 28 percent GST were to be implemented it will “lead to a potential write-off of the $2.5 billion capital invested in the sector" and the potential investments in the next three to four years.
According to a report by Federation of Indian Chambers of Commerce & Industry and EY (April 2023), 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.
“Charging 28 percent GST on every contest played every time with fully taxed winnings will increase the GST burden by 1100 percent," says Malay Kumar Shukla, secretary, E-Gaming Federation. “In addition, owing to the taxation of redeployed player winnings, the same money will be taxed repeatedly resulting in a situation where 50-70 percent of every rupee will go towards GST." This will make the online skill gaming business model unviable, reckon industry experts.
Even the Minister of State for Electronics & IT Rajeev Chandrasekhar sided with the industry saying that, “Will request the GST Council to reconsider tax on online gaming," during the CNN-News18 Town Hall.
Later, he tweeted to clarify: “After the nascent n evolving regulatory framework around the online gaming rules that define permissible online games develops - then we will communicate new framework to gst council amd [sic] rqst [sic] them to consider this new framework." Loss of jobs and revenues
In FY24, the online gaming industry is expected to contribute approximately Rs 4,500 crore in GST at the previous 18 percent GST on the operator’s gaming revenue. “Increase in the rate from 18 percent to 28 percent… would have led to a 55 percent increase in GST collection," said the letter. Even for most global regulated markets such as the UK, the government levies a 15 percent tax on the operator’s gaming revenue.
More than the increase in tax, the methodology of the application of GST on “full value" has proven to be a bigger issue, which as per the industry will “result in wholesale destruction of the sector, including for many MSMEs and startups…" Additionally, the industry is expecting a loss of 50,000 high skilled jobs.
Earlier, the sector saw some relief with the amendment to the Income Tax Act and the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (IT Rules), where both pieces of legislation had drawn a clear distinction between legitimate online gaming activities, betting, gambling, and “games of chance" activities, and also brought in clarity for the sector.
Industry players reckon that all their efforts are in vain if this ruling is implemented. “First the government helms startups as the nation"s growth driver and focuses on growing the FDI in the nation. On the other hand, this action speaks very differently. It will also put on hold investments in the industry globally, and budding entrepreneurs will also be wary of being a part of this sector. The government should reconsider this decision," says Sunil Yadav, CEO, PlayerzPot.
The letter also highlights potential scenarios and how it will affect the industry:
First Published: Jul 21, 2023, 15:49
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