EY report says 28% GST on Skill-Based Online Games Creates Industry Turmoil

The imposition of a 28 percent Goods and Services Tax (GST) on skill-based online games in India has led to significant disruptions in the sector, including funding challenges, slower growth trajectories, job losses, and increased uncertainty.

PC games and developers

Since October of the previous year, the government has enforced a uniform 28 percent GST on the full value of bets placed in online games. This contrasts with the gaming industry’s preference for levying the tax on Gross Gaming Revenue (GGR), the revenue earned by gaming companies.

A possible review of this levy might be discussed at the forthcoming GST Council meeting on June 22, though no decisions have been made yet.

The report, jointly prepared by Ernst & Young (EY) and the US-India Strategic Partnership Forum (USISPF), highlights the severe challenges facing India’s pay-to-play online skill gaming industry due to the recent tax amendments. These games include fantasy games, card games, and casual games.

Key findings from the report indicate that since 2019, the Indian gaming sector has attracted $2.6 billion in Foreign Direct Investment (FDI) from both domestic and global investors, with 90 percent of this investment directed towards the pay-to-play segment.

However, the report notes that since October 2023, some companies have experienced a complete withdrawal of investors due to the new GST regime. Previously, GST accounted for 15.25 percent of revenue.

Since the new regime took effect, GST costs have skyrocketed, consuming 50-100 percent of revenue for 33 percent of companies and even surpassing total revenue for some startups, forcing these startups to operate at a loss.

The impact of the increased GST varies by game format. Casual games, in particular, face threats to their business viability due to the tax hike.

“Over half of the sector’s enterprises are now facing stagnant or shrinking revenues, with 25 percent experiencing growth declines of up to 50 percent, a stark contrast to the previous growth rates of 100-200 percent,” the report stated.

The decreased margins, resulting from the increased GST burden absorbed by companies, have led to layoffs and halted the hiring of specialists in technology, product development, animation, and design.

Many companies have reported job impacts, including hiring freezes, layoffs, and complete shutdowns. This has raised concerns about the sector’s viability and deterred skilled talent from entering the industry.

The report recommends amending the GST valuation mechanism for online money games to levy the tax based on GGR or platform fees — the amount retained by gaming platforms for operating the games —rather than the current full-face value of total deposits.

In October last year, GST authorities issued show-cause notices demanding as much as Rs 1 lakh crore from online gaming companies for tax evasion, highlighting the sector’s ongoing regulatory challenges.

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