Every burgeoning industry is built on the back of its pros and cons. What this means essentially is it is often difficult to grow at a high pace if the sector is caught up in cleaning up its regulatory act. Perhaps this is what the online gaming sector – the play-to-win segment is currently grappling with. As a result, many have started to look for greener pastures outside India. To name a few – WinZO recently expanded to Brazil while MPL expanded to Nigeria this May. “There are two ways to go about the expansion – either the companies expanding abroad focus on foreign markets and the other is relocating but still conducting business with Indian users. The latter would still have the same GST implications as they have right now. However, the former would be more beneficial for online gaming companies since they would not have to pay the 28% GST on face value,” Gowree Gokhale, partner, Nishith Desai Associates, told BrandWagon Online.
According to a joint report by Deloitte and the Federation of Indian Fantasy Sports (FIFS), the online gaming industry in India is expected to grow at a compound annual growth rate of 27% to reach $8.6 billion by FY27. However, the predicted numbers might change post the application of 28% GST on face value.
Besides the hike in GST, during the 2023-2024 Union Budget, the government had levied a 30% tax deducted at source (TDS) on the payment of net winnings in a financial year while the elimination of the Rs 10,000 threshold for levying TDS was the second provision. In recent developments, which were reported by several media outlets, the Directorate General of GST Intelligence (DGGI) sent out a pre-show cause notice to approximately a dozen Online Real Money gaming companies over alleged goods and service tax (GST) evasion of Rs 55,000 crore. Additionally, the Supreme Court of India quashed the Rs 21,000 crore GST show cause notice on Gameskraft, after it stayed the Karnataka High Court’s decision.
Dark era?
Industry critics to a certain level have compared the current situation with the cryptocurrency industry which also saw companies moving out of India, to continue business. And the increase in taxation imposed on the online gaming industry is one such reason. The taxation on the online gaming industry was revised from 18% on gross gaming revenue (GGR) to 28% on face value. According to Krishan Deegalla, CEO and founder, Meta11 Fantasy, due to taxation and regulatory challenges, several companies in both sectors have faced pressures that have either limited their growth within India or pushed them to consider relocating their operations to more favourable jurisdictions. “However, these online gaming and cryptocurrency are two different industries. The challenge for game studios is to remain agile and cater to the needs of users, in some instances this may mean moving outside of India, changing the business model, or passing the cost onto the player,” he explained.
In an effort to streamline costs, immediately post the announcement of a hike in GST, a few online gaming companies laid off staffers. MPL laid off 350 staffers while Rush Gaming Universe let go of 55.
The future?
While expansion allows online gaming companies to rebuild its business, at-home employment will remain a huge area of concern, especially, in the light of layoffs. According to a report by Deloitte-FIFS, the online gaming industry provided employment to more than 50,000 people of which 15,000 are developers and programmers. Online gaming industry witnessed a demand of approximately 50,000-80,000 job roles over the years.
“Indian startups have innovated in business and revenue models to address the unique challenges of the Indian market and have contributed to nation-building by boosting the economy and creating both direct and indirect employment. It hurts the spirit of entrepreneurship and the startup ecosystems when ventures are continuously labelled as ‘tax evaders’” an industry expert said on the condition of anonymity, adding that if startups are spending a disproportionate amount of time seeking survival support, some of them may choose to operate in regions with favourable policies and greater acceptance of their sector, which is fairly large on a global scale.”
For industry experts, if a significant number of online gaming companies relocate or expand abroad, India could witness a decline in revenue from, job losses, and reduced foreign direct investment in the sector.