Aftershocks or warning signs: Gaming firms on thin ice, slim margins

Following the Goods and Services Tax (GST) Council’s recent decision to levy 28 per cent tax on online gaming, horse racing, and casinos, immediate aftershocks were felt in the India’s gaming companies.

The shares of publicly listed gaming firms have already taken a tumble, while smaller companies are expected to be impacted the worst. Although discussions are still in initial stages, industry stakeholders are likely to urge the government to reconsider their decision, Business Standard has learned.

The effective tax rate, which will likely be rolled out after amendments are made to the GST law, is also expected to throw a spanner in the works for large private gaming firms as well.

Queries sent to MPL, Dream11, and Games24x7 — the three gaming unicorns (companies valued over $1 billion) in India — regarding the impact of the revised GST on their operations did not elicit an immediate response.

However, Dhruv Garg, a technology lawyer and head of the All India Gaming Federation, is of the view that smaller firms stand to be impacted the most.

“The revised GST of 28 per cent will increase the tax burned on gaming firms by around 1,100 per cent. The per-game cost for each player will grow threefold. Ultimately, the GST charged will be more than the revenue of many gaming firms,” says Garg.

The business models of many gaming firms might, therefore, be rendered unviable.

Says Mitesh Gangar, co-founder and director of PlayerzPot, a fantasy gaming platform: “The path ahead has become very difficult for us. Until now, we were already operating on a very thin margin of 10–12 per cent (platform fee). The blanket 28 per cent tax on the whole entry amount does not make sense for any online gaming company in the real-money gaming (RMG) segment."

Before the decision, online betting and gambling were taxed at 28 per cent, while 18 per cent GST was applied to the gross gaming revenue of online games. The new tax will apply to the total amount of money deposited by players.

“For instance, if a player deposits Rs 100 as an entry amount, 28 per cent of it will be deducted as GST. Ten per cent of the remaining Rs 72 would be charged as platform fees (Rs 8). This cuts down the overall prize pool for winners, who would now get Rs 120 as total winnings versus an earlier Rs 190. The winnings, in this instance, would equate to an earning of Rs 20, on which a 30 per cent tax deducted at source would be applicable,” explains Gangar.

The immediate impact of the move, he says, would be that users would notice a reduction in their prize money, which would disincentivise them from playing RMG. Ultimately, the revenue of companies, as well as overall tax collection, will take a hit, says Gangar.

As the Council’s decision offers no distinction between either games of skill or games of chance, or RMG and non-RMG games, the impact of the move is likely to be felt across multiple levels and categories, be it user base, revenue, or investor sentiment.

“For non-RMG companies like ours, we expect a slight impact on subscription-driven revenues. Currently, on our platform, we levy 18 per cent GST on the total subscription cost, which now goes to 28 per cent, making it more expensive for the users to get on the platform,” says Soham Thacker, founder and chief executive officer, Gamerji, an e-sports tournament platform.

In the short term, observes Thacker, companies might absorb the impact at the expense of their revenue, or they may consider increasing their subscription costs.

“Many gaming companies, to limit the impact on the investor side, may also choose to relocate their business outside India, making this geography their secondary market,” he says.

Companies like Bowled.io, a social gaming platform, are planning to reevaluate their business models.

“We are discussing with regulators to understand and evaluate the implications of the new GST rate on our operations. In the longer run, however, we believe that we can thrive and grow,” says Akshay Khandelwal, founder, Bowled.io.

Industry watchers also say that the move is contradictory to the recently notified online gaming rules formulated by the Ministry of Electronics and Information Technology.

“Online gaming platforms have been classified as intermediaries. If so, they need to be subject to the 18 per cent slab. Also, there is a classification made in the online gaming rules to distinguish between games of skill and games of chance, as has been ruled by the Supreme Court and the various high courts (HCs),” says Abhishek Malhotra, managing partner, TMT Law Practice.

The Karnataka HC, earlier in May, quashed a Rs 20,989 crore show cause notice against Bengaluru-based online gaming company Gameskraft, a move that the industry hailed as a big win for games of skill.

Experts say that the proposed tax goes against previously established precedents in the industry.