Online gaming investors say 28% GST will make business ‘unviable’

These investors are likely to caution the government that this steep tax could make the industry unviable, while disproportionately hurting small startups, one of the people briefed on the matter told ET. They had previously demanded that GST be levied on the gross gaming revenue, which is the platform fee that the companies collect for facilitating the games, and not on the full face value, or the contest entry amount.

Investors like Tiger Global, Alpha Wave Global, DST Global, TPG, Matrix Partners India and Steadview Capital hold stakes in Indian real-money gaming startups including Dream11, Games 24×7, Mobile Premier League (MPL) and Zupee.

Also read | Regulatory tech companies fear 25% knock-on hit from gaming GST

The Indian gaming sector has raised $2.8 billion from domestic and global investors in the past five years, according to data from Invest India, the national investment promotion agency. Funding has increased nearly fivefold from 2019, show the data.

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“Investors wish to put forth the point in no unclear terms that the move will make the gaming industry unviable … this was conveyed to the finance ministry previously as well,” the person said. “There are 400 million users of online gaming in the country and the imposition of GST on the contest entry amount could make the segment unattractive for users and by consequence the investors.”

In addition to the GST, which is an indirect tax, users are also subject to a 30% income tax deducted at source on the net winnings from an online gaming platform.

The government had earlier dismissed the need for any consultations with the industry on the matter, saying that the decision at the GST Council to impose 28% tax was “unanimous” and that an early review was unlikely.

Also read | Online gaming’s tax troubles

In their letter, the investors are likely to cite global examples to suggest how the jurisdictions that levied tax on the full face value have stifled the online gaming industry, the people said. Countries like the UK, Singapore, Australia, Denmark and Italy levy tax on the gross gaming revenue, while Germany, Portugal and Poland charge tax on the face value of bets.

The sector is one of the most cash-flow heavy sectors in the Indian startup ecosystem, with multiple profitable firms like Dream11 and Gameskraft. However, investors are expected to point out that a number of small startups that are not profit-making could bear the brunt of the steep tax.

Also read | Online gaming companies say only illegal platforms will gain from 28% GST

“The smaller companies may not be comfortable passing on the tax burden to the consumers as much as the bigger ones would … this could hurt a large universe of companies in the sector,” one of the people said.

ET reported on Monday that founders and senior executives of real money gaming companies from across India would be in New Delhi this week to meet top government officials, as they feel the 28% GST on online gaming would significantly shrink the industry.

Prior to this, a group of 130 stakeholders including online gaming companies and industry associations had jointly appealed to the government for reconsideration of the recommendations of the GST Council to impose the tax on the full face value of online gaming.

Also read | Online gaming companies seek more clarity on GST

ET had reported in July last year that global investors including Sequoia Capital India (now Peak XV Partners), Alpha Wave Global, Steadview Capital, D1 Capital Partners, Kalaari Capital and Malabar Investment Advisers had come together and written to finance minister Nirmala Sitharaman, urging her to levy GST on GGR and not the full face value.

On Tuesday, minister of state for electronics & IT Rajeev Chandrasekhar said once the regulatory framework around online gaming rules, which define permissible online games, develops further, his ministry would communicate that “to the GST Council and request them to consider this new framework”.

The electronics and IT ministry has been working to attest self-regulatory organisations that will certify online games under the new regulations for online gaming notified in April.