More than half of India’s online gaming companies have hit a rough patch since the government imposed a hefty 28% goods and services tax (GST) last year. This revelation comes from a report by EY and the US-India Strategic Partnership Forum (USISPF), based on a survey of 12 companies in the sector.
Up until last October, online gaming companies didn’t have a specific tax rate. They typically paid an 18% GST on the platform fee or commission from the money pooled by users. But then, the GST Council decided that a 28% GST would now be charged on the entry fees paid by users, a move that significantly ramped up the tax burden for these startups. This tax is applied to the full value of bets placed in online games, regardless of whether they involve games of skill or chance.
Out of the 12 companies surveyed, only five saw their revenues grow, while seven reported either stagnant or declining revenues.
For two companies, the revenue drop was as high as 50%. This is a big blow to an industry that had been on a rapid growth trajectory,” the report highlighted.
Online gaming platforms usually have multiple ways to generate revenue, such as in-app purchases, in-game advertisements, and subscription-based models. However, the new GST amendment has thrown a wrench into the works, causing a host of issues, including funding challenges, reduced growth, job losses, and increased uncertainty in the sector.
Several companies mentioned that investors pulled out of potential deals because of these issues. For 33% of the companies, GST now eats up 50-100% of their revenue, compared to about 15% under the previous tax regime. This drastic increase has led some startups to operate at a loss, as the tax burden now exceeds their total revenue.
Job losses have been another major fallout. Ten out of the 12 companies faced significant challenges in this area. Four companies stopped hiring but didn’t lay off any employees. However, one-third of the companies had to let go of up to 50% of their workforce. One company laid off more than 50% of its employees, and another had to shut down operations entirely.
The report also points out that four companies haven’t been able to attract capital and may exit the sector if taxes aren’t normalized. Three companies are burning through equity capital, struggling to secure the next round of funding, and are now looking for buyers. One company that was profitable before October last year is now running at a loss. Two companies that were highly profitable before the tax hike are still making profits but at much lower margins.
Despite these setbacks, the Indian gaming industry saw significant growth in FY23, reaching 568 million gamers, with 25% being paying users, according to a report by Lumikai. This reflects a 12% increase in gamers and a strong 17% growth in paying users compared to FY22.
Several online gaming startups, including Gameskraft and Delta Corp, have received notices to pay INR 1.12 lakh crore in GST, prompting many to challenge these notices in court. Adding to the complexity is the possibility that the tax could be applied retrospectively in some cases, which would severely impact the finances of smaller online gaming companies.
In summary, the GST hike has hit the online gaming industry hard, leading to revenue declines, funding issues, and job losses. The future of many startups in this sector now hinges on whether the tax regime can be adjusted to a more sustainable level.
