Recent GST regime disastrous for skill-based gaming industry: report

The fresh GST regime will have a detrimental impact on the revenues and margins of skill-based online gaming companies. | Photo source: AP

The impact of the fresh GST regime on skill-based online gaming companies has been either detrimental to their revenues and margins or downright disastrous, making the business model completely unviable, joint research by Ernst & Newborn (EY) and the US Indian Strategic Agency Forum Partnership has found (USISPF).

After the GST changes, the pay-to-play online skill gaming industry has to pay 28% of deposits.

Since the introduction of the fresh tax system on October 1, 2023, no capital has been raised in this sector. The report shows that some companies have reported complete investor withdrawal from global brands.

As of 2019, the Indian gaming sector attracted FDI worth USD 2.6 billion from domestic and global investors, with 90% of FDI attracted in the pay-to-play format in the online gaming sector.

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“Before the amendment, the cost of GST was 15.25% of revenue. However, since October 2023, the cost of GST has increased manifold – GST now consumes 50-100% of revenues for 33% of companies and even exceeds the total revenues of startups.”

More than half of enterprises in this sector are struggling with revenue stagnation or decline, with 25% of enterprises reporting a decline in growth of up to 50%.

Reduced margins due to the GST raise have resulted in employee layoffs and a complete hiatus in hiring for specialized skills such as technology, product, animation and design.

The report recommends changing the valuation mechanism for online cash games to collect GST on the current “full face value of all deposits” for platform fees, i.e. the amount retained by online gaming platforms for operating the game.

In turn, most countries around the world tax platform fees. In narrow cases where countries impose indirect taxes on deposits, the tax rate is lower to be consistent with platform fees, such as the deposit tax rate in Poland and Portugal of 12% and 8% respectively.

The raise in GST costs will prompt customers to switch to alternative options such as offshore platforms, resulting in loss of revenue to the exchequer, the report said.

“Given the adverse impact of this taxation on the growth of the industry, it is recommended that GST be added to either the gross gaming revenues or the platform fee,” said Bipin Sapra, tax partner, EY India.