There has been much debate on the condition of the online gaming industry in 2023 as the sector has been subject to regulatory changes. These changes have altered the course of the online gaming industry. Online gaming companies have been growing at a rapid pace since 2020. However, the regulatory changes in 2023 witnessed a steep decline in the growth of the industry. Online gaming companies have resorted to different ways including expanding abroad, laying off staffers, and cutting advertisement budgets, among other things to survive. “In the erstwhile Service Tax regime, online skill gaming companies paid tax on the service fee or Gross Gaming Revenue (GGR). As India transitioned to the goods and services tax (GST) regime, skill gaming platforms continued to pay GST on GGR. However, the recent amendments to levy GST on 28% on deposits have led to increased operating costs, reduced profitability and a decline in user participation,” Joy Bhattarcharjya, director general, FIFS, told BrandWagon Online.
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As per a recent EY report, the online gaming segment in India experienced a compound annual growth rate (CAGR) of 28% culminating in a market size of Rs 16,428 crore in FY23. However, industry estimates suggest it will reach Rs 33,243 crore in FY28, showing a 15% CAGR.
The Ministry of Electronics and Information Technology (MeitY) announced new gaming rules in April 2023 by amending the IT Rules of 2021. As a result, self-regulatory bodies (SRBs) or self-regulatory organisations (SROs), were introduced. These will approve games which can operate in the country. Additionally, online games that involve any kind of gambling (including ads) will be prohibited. Furthermore, SROs will also make sure games follow guidelines to prevent addiction and mental harm through parental controls, frequent warning messages, and age-rating systems as well as the option to opt-out after reaching their limits for time or money spent. “Basis information around gaming companies shutting operations and laying off employee, the 28% GST on online gaming startups is a double blow, stifling growth and deterring talent. Additionally, The absence of a self-regulatory body further endangers user safety and innovation, threatening the sector’s long-term viability,” Shivani Jha, director, EPWA, said.
The 50th and 51st GST Council meetings held earlier this year were turning points for the gaming industry. Those meetings resulted in the decision to levy 28% GST on face value in place of the 18% GST on gross gaming revenue (GGR). A majority made the decision win as Sikkim, Goa and Delhi were the ones to oppose the decision. The decision made the online gaming sector in India one of the world’s most highly taxed gaming sectors with Poland and Portugal.
These regulatory changes were met with retaliation from the industry as it had expected the GST Council to lower the taxation. Moreover, a few companies from the real-money online gaming industry resorted to layoffs to cut costs. For instance, MPL, a fantasy sports platform and Hike-owned Rush Gaming Universe laid off 350 and 55 staffers, respectively. Spartan Poker, an online gaming company, also laid off staffers to cut costs. “Online gaming companies are looking at ways to minimise the GST impact on their operations, which includes critical decisions such as absorbing the GST impact instead of passing it on to the users, cost optimisation among other things,” Bhattacharjya said.
A study by Esya Centre highlighted that a 30% increase in participation fees would nudge about 71% of online gamers to reduce their time spent on gaming. These players could eventually move to offshore players without tax obligations, causing a dent in state coffers and compromising user safety. “Responsible gaming practices are set to take centre stage, with gaming platforms placing a greater emphasis on age verification, responsible advertising, and enhanced player support. The industry anticipates the implementation of IT Rules for online games and the establishment of self-regulatory bodies for game verification. Additionally, a six-month review by the GST Council will assess the impact of the 28% GST rule, while hopes are high for the resolution of ongoing concerns surrounding retrospective taxation,” Roland Landers, CEO, All India Gaming Federation, highlighted.
Moreover, the implication of 30% TDS was announced during the Union Budget earlier this year along with the removal of the Rs 10,000 threshold, adding to the woes of the online gaming and fantasy sports platforms. Additionally, the Directorate General of GST Intelligence has sent show-cause notices to a few online gaming and fantasy sports platforms. Dream 11 and Play Games 24/7 were sent Rs 28,000 crore and Rs 20,000 crore GST show-cause notice respectively. Furthermore, Gameskraft also received a show-cause notice of Rs 21,000 crore which was later quashed by the Karnataka High Court and was further stayed by the Supreme Court. Recent developments would include the striking down of bans on Rummy and Poker by the Madras High Court, classifying both the games as games of skill and not games of chance.
The Impact
The online gaming sector was one of the top spenders in terms of advertising earlier this year at the TATA IPL, according to TAM. However, the stance changed significantly as the Asia Cup and the World Cup drew closer. Online gaming and fantasy sports platforms became hesitant to advertise at the ICC Men’s Cricket World Cup 2023. Industry professionals indicate that despite the ICC World Cup and the ongoing festive season, RMG players significantly scaled back on ad spending, as per an EY report.
To the luck of online gaming and fantasy sports companies, 2023 was the year of cricket with IPL, Asia Cup and The ICC Men’s Cricket World Cup all falling a few months apart which helped the online gaming companies through the crisis. The quadrennial event witnessed a boost in viewership and fan engagement for the streaming channels as well as the fantasy sports platforms. According to industry experts, user interactions and app traffic were impacted by players’ performances on the field, driving the popularity of the fantasy game. The spike in activity exceeded its previous status, from what it is believed. Increased interest was sparked by the World Cup, bringing return as well as first-time users to platforms.
Moreover, the current taxation regime has resulted in a decline for the real-money gaming space as there is a decline in projections to 75.4% by FY28 from an 83% contribution in FY24, according to a report by EY. “The last twelve months have seen significant changes concerning the policy framework for the online gaming industry. The levying of the new rate of GST on the industry, which is amongst the highest in the world, has set the industry back by many months,” Saroj Panigrahi, chief operating officer, Games24x7, added.
A consortium of 30 domestic and international start-up investors, including Tiger Global, Peak XV Partners, and Steadview Capital, penned a letter to the Prime Minister’s Office (PMO) in July 2023, highlighting concerns that the amendment could potentially lead to a write-off of the Rs 20,000 crore capital invested in the sector, and is also expected to impact prospective investments, estimated to be at least Rs 32,000 crore in the next three to four years, thus impeding the growth of the gaming segment in India.
Outlook 2024
While 2023 has been a rollercoaster ride for the online real-money gaming industry, industry experts believe 2024 can be different.
Additionally, the sector recently signed a voluntary Code of Ethics for Online Gaming Industries to assure the government of the user safety norms followed by online real-money gaming platforms and fantasy sports platforms. “The Indian online gaming sector has demonstrated resilience by embracing new technologies, navigating the challenges posed by the GST hike, and adapting to a shifting regulatory landscape. Moreover, the increasing smartphone penetration and rising incomes provide grounds for optimism,” Ankur Singh, CEO and founder, Witzeal Technologies, highlighted.
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