28% GST on Gaming Enterprises Causes Industry-wide Disruptions

According to a research released on Wednesday, the enactment of a 28 percent Goods and Services Tax on skill-based online games has set off a series of negative effects that would include financial limits, slower growth rates, job losses, and increased uncertainty in the industry. 

A consistent 28 percent GST has been applied to the entire amount of bets made on online games from October 2023. Meanwhile, the gaming businesses want to apply a 28 percent GST to the Gross Gaming Revenue (GGR) that the sector generates.

Nothing has been finalized yet, but at the next GST Council meeting on June 22, a revision of the levy may be considered.

With the recent changes to the GST tax that impose a 28% deposit tax, Ernst & Young (EY) and the US-India Strategic Partnership Forum (USISPF) jointly released a research that provides new insight into the significant obstacles that India's pay-to-play online skill gaming sector faces.

The impact of the pay-to-play business, which has been negatively impacted by the amended GST system, was also underlined in the research. There are card games, fantasy games, and casual games.

The results show that since 2019, the Indian gaming industry has drawn FDI totaling USD 2.6 billion from both domestic and foreign investors. Ninety percent of this FDI was drawn to the pay-to-play online gaming sector.

The research said that just as the new GST system was taking effect, "some companies reported a complete withdrawal of global marque investors since October 2023."

Prior to the modification, 15.25 percent of revenue was made up of GST costs. But starting October 1, 2023, the cost of GST has skyrocketed, accounting for between 50 and 100 percent of the sales for 33 percent of businesses and even more than the whole revenue for startups.

According to the article, "these startups now have to operate at a loss."

Interestingly, the formats also affect how the GST works. For example, the financial sustainability of casual games is being threatened by the exponential growth of GST.

"More than half of the companies in this industry are either seeing declining top lines or stagnating sales, and 25% are seeing growth decreases of up to 50%. This is a significant divergence from prior growth rates of more than 100–200%, the research stated.

Reduced profit margins from higher GST (absorbed by the firms) resulted in staff layoffs and a total stop to acquiring specialized talent in fields like technology, product, animation, and design.

The majority of businesses have disclosed how their operations have been affected, including hiring freezes, layoffs, and complete shutdowns. The analysis stated that the industry's problems have been made worse by the new GST regime, which has raised questions about the industry's sustainability and is deterring qualified individuals from entering the profession.

The research suggested changing the way that online money games are valued such that the amount that online gaming platforms keep for running a game (GGR/platform fees) is instead of the present "full-face value of total deposits," where GST is now levied.

The GST officials demanded as much as Rs 1 lakh crore from online gaming businesses in October of last year for tax fraud.