Goods and Services Tax (GST) has consumed 50-100% of the revenue for around 33% of companies, even surpassing total revenue for startups, forcing them to operate at a loss, according to the latest report by Ernst & Young (EY) and the U.S.-India Strategic Partnership Forum (USISPF). The same GST cost constituted 15.25% of revenue before the amendment of the tax rates on pay-to-play online gaming industry, the findings show.

Highlighting the challenges faced by India’s pay-to-play online skill gaming industry following the recent GST tax amendments imposing a 28% levy on deposits, the report reveals how the new tax has triggered a cascade of adverse effects. These range from funding constraints, stunted growth trajectories of companies in the sunrise sector, job losses, and heightened uncertainty.

The GST Council had in October last year imposed 28% tax on the full face value of entry amounts in online skill gaming.

The changes to the tax regime paused the FDI in the sector. The sector has faced a “funding winter” since October 2023, despite attracting $2.6 billion in FDI from domestic and global investors since 2019, 90% of which was directed toward the pay-to-play format. "Some companies reported a complete withdrawal of global marquee investors at the onset of the new GST regime," the report says.

The impact varies with formats; casual games, in particular, face an existential threat due to the exponential GST increase, the findings show. “Over half of the sector’s enterprises are witnessing stagnant or declining revenues, with 25% experiencing growth declines of up to 50%, a stark contrast to previous growth rates of 100-200%,” the report reveals.

As margins decrease due to high GST levy, platforms have resorted to significant employee layoffs and there has been a “complete halt in hiring for specialist skills such as technology, product, animation, and design”, the report says.

Besides, many companies have reported impacted jobs through no hiring, layoffs, and even shutting down operations. “The new GST regime has raised concerns about the sector’s viability.”

With such a serious impact on the new-age sector, the future also seems uncertain. The survey says a third of companies are contemplating exit strategies if high tax rates persist, highlighting “existential threats”. “17% of companies are actively seeking buyers due to equity losses, and another 17% have transitioned from profitability to losses since October 2023.”

Notably, as highlighted in the report, India has the highest indirect taxation regime for online skill gaming globally. “Most countries tax on GGR/platform fees, the actual revenue for the platforms. In limited cases where countries tax deposits, the rate is lower to maintain parity with GGR models.”

The report cites Poland and Portugal, where tax deposits on pay-to-play online skill gaming are 12% and 8%, respectively.

“Most companies prefer that the GST should be applied to either the Gross Gaming Revenue or the platform fee for the industry to reach its potential,” said Bipin Sapra, Tax Partner, EY India. Sapra adds that this approach recognises the “true value” of taxable supply is the platform fees, which cover the services provided by the gaming platforms, while the remaining amount contributes to the prize pool for winners.

“India should align with the global practices and clearly distinguish between games of skill and games of chance for online gaming taxation and regulation,” says Mukesh Aghi, President and CEO of USISPF, adding that India can benefit from this approach by bringing in new age technologies and investments.

Advocates for reviewing the GST Council’s decision to tax pay-to-play online skill games from deposits to platform fees/GGR say it’ll support the flourishing of legitimate Indian start-ups and will prevent many from turning to offshore platforms that evade taxes.

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