Will kill 99% of the companies in less than 6 months: Gaming Cosâ€™ open letter on 28% GST

The online gaming companies and industry associations have jointly issued an Open Letter urging to save the Indian online skill gaming industry after the GST Council recommended 28% GST on this industry.

In the Open Letter, ‘Death by a 1000 cuts’, the companies said, “We are a group of 100+ young Indian entrepreneurs and CEOs who are trying to create a vibrant online gaming industry capable of competing globally. We believe that the online gaming industry will be one of the cornerstones of the $1 trillion digital economy vision of the Hon’ble Prime Minister.”

Giving the size of the industry and its growth potential, the letter stated that the online skill gaming is currently a $2.5 billion sunrise sector, set to reach $5 billion by 2025. The total number of online gamers grew from 360 million in 2020 to over 420 million in 2023. India’s gaming industry attracted FDI of about $500 million between 2014 and 2020, and over $1.5 billion between January 2021 and June 2022. The industry is growing at an average CAGR of around 30% and currently supports lakhs of direct and indirect jobs, and these numbers will grow substantially in the next few years.

“However, the recent recommendation by the GST Council to club Online Skill Gaming, a Constitutionally protected and differentiated category, with betting and gambling has left the industry with no future at all. The proposal to charge GST on the entire Deposit Value, instead of the Platform Fee, will kill 99% of the Companies in the sector in less than 6 months. This will undo all the work done by the Central Government to support the industry, and lead to a very large number of immediate job losses and business closures. Additionally, this announcement has immediately driven users to the offshore gambling operators, which is anticipated to only grow with time this will ultimately lead to neither tax collection nor the growth of the industry.”

The proposed implementation of a 28% GST on the deposit value of online gaming poses a threat to untimely death of industry’s continued success, and gaming & technology innovation in India and will make the sector unsafe for gamers and the youth by pushing them towards unregulated and illegal gambling platforms, the gaming companies maintained.

The letter cited 10 points that highlight the adverse consequences of such taxation:

Hampers the Digital India Initiative and Hon’ble Prime Minister’s Vision:

The Hon’ble Prime Minister has multiple times championed the online gaming industry and stated that India should be a leader in the space. Additionally, the Digital India initiative aims to transform India into a fully connected and digitally empowered society. Taxing online gaming to the point of unviability contradicts this vision and hampers the government's relentless efforts to promote Indian digital entertainment and technology-driven innovations and affects all the key mission mode programs of the Hon’ble Prime Minister including Make in India, Startup India, Digital India and the ability to create a vibrant self-reliant Aatma Nirbhar Bharat. This untimely death of an emerging sector would discourage the youth from Entrepreneurship, the key driver of Innovation, Job Creations, and Aatma Nirbhar Bharat.

Negative Implications for Startups and MSMEs:

The implementation of the recommendation of the GST Council will result in an unprecedented 400% - 500% increase in GST burden. This is a killer for most gaming companies in India. This will stifle competition, hinder innovation, and impede the growth potential of the industry. The implementation of the Council recommendation will disproportionately impact the large number of MSMEs and startups, making it challenging for them to survive.

Impact on Jobs:

The industry employs over 1 million people directly and indirectly such as engineers, designers & animators, content creators, game streamers who belong to Tier 2 to Tier 5 cities and earn their livelihood by streaming and distributing these games among the masses. The growth projections of the industry promised more than 5 lacs new jobs over the next 5 years. The sharp decline in revenues and decreased participation from the users will lead to companies making cuts in their jobs & spending, a majority of which goes towards employing the Indian youth.

Impact on Consumer Affordability:

The proposed recommendation will disproportionately increase the cost of each game for over 500 million users of Bharat that the industry serves. The user, who is already required to pay 30% income tax on winnings, will be unable to bear such a large increase in cost and will shift to black market operators to avoid the increase in playing costs and reduction in the winning pool. This will result in proliferation of the underground black economy and numerous criminal activities.

Offshore Gambling Sites to be the Unintended Beneficiaries:

While the sunrise Indian online gaming industry will struggle to survive, the biggest beneficiary of such a change in the tax regime will be black market operators including illegal offshore gambling websites and nefarious unscrupulous elements, resulting in substantial tax loss to the government and players which won’t be accountable and fall under the under the proposed SRB regime by MeiTY.

Stifling Foreign Investment and Global Relevance:

MeitY’s decision to amend the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules to bring in online gaming intermediaries within its ambit was received extremely positively and would have resulted in significant FDI inflows. However, the imposition of a fatal GST rate will strongly debilitate investors, both domestic and foreign, from considering India as a viable investment destination. It may be noted that the impact will not only be on attracting fresh capital in Gaming but would have a far wider impact on the Indian Startup ecosystem as a whole, as majority of these financial institutions invest across sectors and favorable regulatory landscape is one of the single most important drivers for FDIs. Empirically, several marquee investors are keen to make investments and have been waiting for a promising outcome on regulatory and political certainty pertaining to Online Gaming. In addition, there are more than $2.5 Billion of investments already made which are at stake on this decision. This move would set an unfortunate example for the entire startup ecosystem and access to capital for entrepreneurs across sectors would be hugely impacted.

Losing the One in a Million Opportunity of Bharat to become a Global Gaming/ Technology Leader:

Countries around the world are actively supporting and nurturing their respective gaming ecosystems. India currently has only 1% of global gaming market share while USA and China have 23% and 26% market share, respectively. However, over the last 5 years, with 15 Billion annual mobile game downloads, India is clocking the highest number of game downloads globally. US and Brazil are a distant second and third with 5 Billion downloads each. This is an extremely unique opportunity where India is ahead of every country by a great distance and can emerge as the hottest global gaming powerhouse. This opportunity is fueled by Companies that would be dead by proposed taxation and the battle to solve for survival over innovation in technology and content creation, taking away from India a rare, remarkable, and real opportunity of becoming a Global Technology & Gaming Leader.

Missed Opportunities for Exports:

The Companies we represent has the potential to become a major player in exporting content, technology, computational sciences, gaming services, and the accompanying innovative business models. However, change in taxation could hinder the industry's ability to survive and take advantage of international market opportunities. It would leave all Indian Gaming Companies uncompetitive when compared to their Global counterparts.

Disproportionate Impact on Revenue Generation:

It is crucial to recognize that online gaming business already contributes significantly to the government's revenue through various taxes and levies. We understand the rationale for increasing revenue to the exchequer for the growth of our Nation. However, such growth in revenue is only possible when industries can operate in an economically viable environment.

India the only exception to global benchmarks:

GST on platform fee or gross gaming revenue is the only international practices wherein multiple countries, including France and the United Kingdom have moved from levy of tax on the stake value to Gross Gaming Revenue/Platform Fee, as the former has led to shifting of business to the grey market and substantial reduction in tax revenues.

Currently, the industry is paying 18% GST on GGR/ platform fee. An increase of GST to 28% on GGR/ platform fee will result in 55% increase in GST quantum, the gaming companies stated, adding “Any implementation of retrospective taxation is completely debilitating and also reflects poorly on ease of doing business. A predictable, stable, regulatory framework, and supportive taxation policies which facilitate innovation will allow the industry to compete on the world stage.”