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Steep GST rates for online skill-based gaming could impact future of Indian gaming sector.
In brief
Levying 28% GST on the total money deposited with online skill gaming operators has led to a significant tax impact on the gaming ecosystem.
India reported some of the highest taxation of online skill games globally.
Reassessing the tax liabilities for the gaming sector might have the potential to help the ecosystem thrive and create employment opportunities.
As a sunrise sector, India’s skill-based online money gaming industry could play a crucial role in making India a US$5 trillion economy by 2025 (source). However, the Indian government’s decision to levy GST on the total money deposited with the pay-to-play gaming platforms might have impacted the sector’s ability to garner funding and generate growth and employment over the past year.
Industry analysis of new GST regulations for online games
Despite its promising trajectory, the industry currently stands at a critical juncture faced with challenges exacerbated by the recent GST amendments and regulatory ambiguities.
The USISPF survey found companies facing challenges in raising funding, carving out margins and even stalled revenue since the GST rates were hiked. This change resulted in a higher tax burden for companies operating in this sector, many of which had to absorb the increase in tax to sustain their operations.
Skill based online money gaming industry has been impacted by the high levels of taxation under the GST regime. Considering the adverse effects of this taxation on industry growth, the survey of gaming companies shows that the most companies prefer that the GST should be applied to either the Gross Gaming Revenue or the platform fee for the industry to reach its potential. This adjustment would foster sectoral growth and prevent revenue leakage. This approach recognizes that the true value of taxable supply is the platform fees, which cover the services provided by the gaming platforms, while the remaining amount contributes to the prize pool for winners.
Bipin Sapra
Tax Partner, EY India
Stalled revenue growth
Of the companies surveyed, 42% reported revenue growth following the GST amendment, while 58% faced revenue declines or stagnation, including two companies with a significant 50% decrease in revenue. This represents a notable shift from the industry's prior trend of exponential growth and highlights the significant financial impact of GST on the online gaming sector.
Job Erosion
The hike in GST, absorbed by the companies, led to reduced margins and triggered a cascade of workforce reductions, including layoffs, hiring freezes, and in some cases, complete cessation of operations, affecting employment across the majority of these companies.
Our Valuation, Modeling & Economics services guide you through valuation and business modeling implications to better understand the impact. Find out more.
Most companies covered in this USISPF survey have expressed a preference for the amendment of the GST valuation mechanism to a ‘net deposit’ model (i.e., GGR/ platform fee) with certain companies recommending reducing the total withdrawals (either winnings or otherwise) from the total deposits for GST purposes.
The report found that assessing the value of services provided by gaming companies based on the amount of contest entry deposits is both inconsistent as there is no direct correlation between the gaming company's provision of technology or infrastructure and the deposits received for contest entry fees.
Globally, most countries levy tax on Gross Gaming Revenue (GGR, i.e., the amount retained by the gaming platform). In limited cases where countries levy indirect taxes on total deposits, the tax rate is nominal to maintain parity with tax levied under the GGR model and not burden the sector with an unduly heavy taxation of online skill games.
This report presents an overview of the taxation ecosystem for the skill-based online gaming segment in India, and its larger impact on the gaming tech industry in India. It breaks down the revenue model of the companies and taxation models for the gaming ecosystem while comparing it with examples from regulatory best practices across leading gaming ecosystems globally. The report further recommends that the policymakers should consider amending the valuation mechanism for skill-based gaming revenue and GST on Gross Gaming Revenue (GGR), which is the amount retained by online gaming platforms for operating a game, instead of “total deposits”.
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