India’s gaming industry has been on a meteoric rise over the last few years, boasting impressive numbers, expanding user bases, and becoming a global hotspot for online gaming and esports.
However, the recent introduction of a steep 28% Goods and Services Tax (GST) on online gaming has raised concerns about its impact on the industry. Is the taxation policy stifling the gaming sector’s potential, and if so, what can be done to alleviate the damage? Let’s find out!
India has rapidly emerged as one of the world’s largest mobile gaming markets, with over 500 million gamers as of 2021. The gaming ecosystem is thriving thanks to affordable smartphones, widespread internet access, and a young, tech-savvy population. In fact, India recorded the highest number of app downloads for mobile games globally, cementing its position as a major player in the gaming world.
The industry has been expanding at an impressive CAGR of 20.7%, and it’s expected to grow even further. As of FY 2022, revenues from transaction-based games increased by 21% from the previous year, and projections show that the sector is on track to reach ₹231 billion by FY 2025.
India’s success is also reflected in the rise of gaming unicorns like Dream11, Mobile Premier League, and Game24x7. These platforms have drawn significant investments, both from domestic and international sources, totalling $2.8 billion in the last five years. The fantasy sports market alone boasts a user base of 180 million.
In August 2023, the 51st GST Council meeting introduced significant changes to the taxation of online gaming platforms, especially those offering skill-based games. The decision to impose a 28% GST on the entire deposit amount, rather than just the platform’s earnings (Gross Gaming Revenue or GGR), was met with alarm by industry players.
Previously, taxes were levied on the platform fee or GGR, which is the money the platform retains after distributing prize winnings to players. The shift to taxing the entire deposit amount fundamentally changes how much tax a gaming company has to pay, and this additional burden could have far-reaching effects.
Let’s break down the implications:
India now stands as one of the countries with the highest taxation rates on online skill-based gaming. Globally, most countries levy taxes on the platform’s earnings (GGR), allowing the industry to remain competitive and sustainable.
In a survey conducted by USISPF (US-India Strategic Partnership Forum), a majority of gaming companies expressed their preference for the GST to be applied to GGR or platform fees instead of total deposits.
One of the immediate effects of this taxation policy has been a stalling of revenue growth for gaming companies. According to the USISPF survey, while 42% of companies reported some revenue growth post-GST amendment, 58% of gaming companies either saw stagnant growth or revenue declines. Two companies even reported revenue drops as severe as 50%.
This is particularly concerning in a sector that was expected to create 1,50,000 new jobs by 2025. With reduced investment and growth, these employment opportunities are now at risk, contributing to a broader economic impact.
Interestingly, the government has seen a substantial increase in tax revenues from online gaming since the GST rate was raised. Finance Minister Nirmala Sitharaman reported that GST revenues from the sector surged by 412% in the six months following the tax hike, netting ₹6,909 crore.
However, while this may seem like a win for government coffers, the long-term consequences could be detrimental. With companies absorbing such high tax rates, many are struggling to remain competitive or even sustain operations. If the sector continues to shrink under this heavy tax burden, the very source of these increased revenues could dry up in the years to come.
The Indian gaming industry now stands at a critical juncture. On one hand, the sector is ripe with opportunities. India is home to 455 million gamers, the second-largest gaming community in the world, and the potential for growth is undeniable. On the other hand, the recent GST revisions have placed significant roadblocks in the path of that growth.
To prevent further erosion of the sector’s progress, many gaming companies are urging the government to reconsider its approach. A shift to the net deposit or GGR model, which focuses on taxing the actual revenue earned by platforms, could alleviate much of the financial strain while allowing the industry to continue its rapid expansion.
While the GST hike has certainly slowed the momentum of the gaming industry in India, it hasn’t completely derailed it—at least not yet. The increase in tax revenue shows the government’s intent to capture more value from this booming sector, but it comes at the cost of industry health.
To ensure the future of online gaming in India remains bright, a balanced approach is needed. The government and industry stakeholders must find a middle ground where the sector can continue to grow and contribute to the economy while maintaining fair and sustainable tax policies.
For now, the GST hike has certainly stunted the growth of the industry, but with the right reforms, India’s gaming industry could bounce back stronger and continue its impressive growth trajectory.
Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.
Source:
https://primuspartners.in/docs/documents/ZG7jAL3QW6qZmI88lkK3.pdf
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