The Emperor and the Harkonnens wiped out an entire race of people from planet Caladan called the Atreides in Dennis Villeneuve’s adaptation of Frank Herbert’s science-fiction novel ‘Dune’. A similar phenomenon has taken shape in India as the online gaming industry continues to struggle as taxation has slowly exceeded the sector’s valuation. Companies including Dream 11, Gameskraft and Games 24×7, among others, have received show-cause notices from the Directorate General of GST Intelligence (DGGI), stating that the companies have evaded taxation. “The past decade and a half saw many Internet businesses being set up in India inspired by global companies and their business models, as well as solving unique opportunities that are inherent to India. From e-commerce to gaming, the spread of these companies has been wide and has multiple use cases. It is unfortunate that in most of these cases, the regulation has played a ‘catch-up’ game, rather than evolving at the same pace,” Sreedhar Prasad, former head- Internet business, KPMG and Internet business advisor to startups, told BrandWagon Online, adding that the big concern with this approach is that many businesses and their operating models were set, many large investors have bet on these models, and then a regulatory change comes, which impacts the confidence in this ecosystem. Maybe some of these regulations are apt and futuristic but their timing and treatment could be relooked at, with the objective of building continued trust in the Internet business ecosystem in India.
As per a Lumikai report, the goods and service tax (GST) demands from the DGGI stood at $8.9 billion in 2023 while the valuation of the entire industry was approximately $4 billion. Moreover, the report suggested that the growth of the real-money gaming sector is expected to stunt due to the recent taxation policies and consolidation within the sector.
Reeling from the effects?
The 28% GST on full value was implemented from October 1, 2023, as announced in the 51st GST Council meeting. Before this, online gaming companies paid an 18% GST on gross gaming revenue (GGR). Post the announcement, online real-money gaming companies including Mobile Premier League and Hike-owned Rush Gaming Universe laid off staffers as a result of the increase in the taxation rate. Industry experts believe there are concerns about the financial burden of retrospective taxation placed on operators and players alike. Not to mention, this has adversely impacted investor sentiments as the total investment in the sector dropped to $61.1 million in 2023 from $500.2 million in 2021.
While the industry continued to be taxed at 28% GST with the possibility of the application of retrospective taxation, offshore gaming companies continue to reap benefits from the increase in taxation. According to experts, despite a categorical directive by the central government requiring registration in India and compliance with the law of the land, the violations have continued unabated. With no registrations of offshore gaming companies in India, they can not be taxed at 28% GST as online real-money gaming companies are. “The unchecked operation of offshore betting industries poses a direct threat to the RMG gaming industry. Not only does it create an uneven playing field by evading taxation and regulatory oversight, but it also undermines efforts to ensure fair competition and consumer protection within the industry. Addressing this issue is crucial to maintaining a level playing field and fostering a healthy gaming ecosystem,” Sunil Yadav, CEO, PlayerzPot, said.
Additionally, there seem to be accountability issues with offshore gaming platforms, exposing consumers to risks including fraud, money laundering and exploitation, among others. According to a media report, a 20-year-old student took his own life due to financial losses incurred allegedly from using an illegal offshore gambling platform reported as 1win. “The battle of perception, however, is being fought by genuine real-money gaming companies involved in constitutionally protected activities. Such domestic, legally run businesses face a taxation rate of 28% on the full value of their operations and are facing the prejudicial impact of the inability of the populace to distinguish between the two types of activities,” Abhishek Malhotra, counsel, TMT Law, highlighted.
Uncertain future?
From what it seems the future remains uncertain for online gaming companies amid retrospective taxation demands from the DGGI. Not to mention the government’s decision to directly regulate the industry yet at the same time the lack of a regulation. Industry experts opine retrospective taxation presents a threat to the gaming industry, causing uncertainty and hindering investment. “Companies would face sudden tax liabilities on income not previously accounted for, potentially leading to financial strain and even bankruptcy. This uncertainty would deter investors, slowing innovation, job creation, and overall economic growth,” Yadav added.
Additionally, the Indian startups operating within the legal boundaries of the industry are affected by the presence of unregulated offshore actors, with parliamentary reports suggested as of December 5, 2023, not a single company has complied and registered themselves in India, in an attempt to evade taxation at 28% on full value, according to Malhotra.
Industry experts believe prospective taxation would offer stability, allowing businesses to plan and budget. By providing a predictable environment for investment and growth, prospective taxation supports the sustainability and development of the gaming sector while offering a balanced approach. Furthermore, experts suggest prospective taxation would encourage compliance and foster an environment for sustainable growth and development within the gaming sector. “While taxation changes are inevitable, policymakers must consider the broader implications and opt for a tax regime that fosters growth, innovation, and fairness within the gaming industry,” Yadav highlighted.