“We have been waiting for the GST Council’s decision for almost three years so that there is some clarity on taxation, but this is a shocker,” a founder of an online gaming unicorn said.
To understand the trauma, we’ll have to delve a little deeper into how online gaming companies, especially those involving real money, classify their revenues.
When a user wants to play a game like a fantasy sports competition or card games like rummy or poker, where they stand to win real money based on the outcome, they first deposit a contest entry amount (CEA). From this, prior to creating a pool that will be passed on to the winner, the platform deducts its fee — typically between 8-15%. This is called the gross gaming revenue (GGR).
What the gaming companies had sought, and were hoping for, was that the tax be levied on the GGR. However, the GST Council felt that the tax should be imposed on the CEA.
This is in line with the rules under which casinos are taxed, where the tax is charged on the purchase of the chips required to play games.
Why the extreme measures?
The decision of the GST Council rests on two legs — morality, and fairness.
In an interview with ET, revenue secretary Sanjay Malhotra said that there was a moral and social dimension to the decision. Finance minister Nirmala Sitharman had also said in the press conference following the GST Council meeting that state chief ministers had deliberated on the moral aspects of online gaming. She said that they also discussed whether it was fair to tax online gaming at the same rate as some essential goods and services.
Batting for the GST Council’s decision, Minister of State for Electronics & IT Rajeev Chandrasekhar said on July 13 that while online gaming is an important segment, wagering and games of chance have led to increased cases of user harm and money laundering. “The #GSTCouncil’s decision to levy taxes on #onlinegaming is a well-thought out preliminary measure,” he said in a tweet.
Also read | States authorised to regulate gambling, not online gaming: MoS IT Rajeev Chandrasekhar
Meanwhile, the government has also cited the growth potential of the online gaming industry to suggest that all will be well despite the latest development. Two of the largest companies in the segment — Dream11 and Gameskraft — have reported profits for the last two fiscal years.
For the year ended March 31, 2022, Dream11 reported a 50% increase in operating revenues, at Rs 3,840.75 crore, with a net profit of Rs 142.86 crore (down from Rs 327.59 crore in FY 20-21). Gameskraft reported a nearly 50% jump in operating revenues, at Rs 2,112 crore, with a net profit of Rs 937 crore, 28% higher than the preceding year.
So, what next?
My colleague Soumyajit and I spoke to some gaming industry executives and tax experts to answer this question, and have written about how these companies plan to seek clarity on some of the finer details of how the tax will be made applicable.
“We consider this to be a failure from our end for not being able to put across our view to the group of ministers of the GST Council. But now is the time to fully assess the situation,” one of the executives told us.
Companies are getting into a huddle to figure out the next steps, and even though some differences of opinion have emerged in the early conversations, the new reality is sinking in.
“Things might get relatively more difficult for some of the smaller players. Investors are already asking whether the sector is as attractive as before. We need to decide whether to pass on the entire burden to the users and retain our profit levels in the short term, or play the longer game (and absorb some of the increased tax),” another executive said.
Read our full coverage on gaming regulations:
Online gaming, casinos set to attract 28% GST: The Goods and Services Tax (GST) Council Tuesday decided to impose the top 28% slab on online gaming, horse racing, and casinos. GST on online gaming will be imposed without any differentiation of whether it’s based on skill or chance.
Online gaming companies await clarity on 28% GST: Online gaming companies, which have slammed the GST Council’s decision to impose the maximum 28% slab on the full face value of the business, said they are awaiting details on the applicability of the levy before deciding their next steps.
TCS can be imposed on payment service providers for online gaming: Revenue secretary Sanjay Malhotra | Edited excerpts from an interview with ET.
Exclusive | GST tweak may cost 40 online gaming companies Rs 10,000 crore: GST authorities are set to send fresh tax demand notices against 40 online gaming companies, said people with knowledge of the matter. Officials said demands against the 40 gaming companies could tot up to Rs 10,000 crore.
Gamespotting: MeitY receives three applications for forming SROs | The ministry of electronics and information technology (MeitY) has received at least three proposals for the formation of self-regulatory organisations (SRO) for online gaming. The deadline for the submission of proposals was July 6.
ETtech Exclusives
Tesla looking to move its supply chain to India: Tesla has held discussions with union government officials exploring the possibility of bringing its auto parts and electronics supply chain to India, and getting incentives and tax breaks in the process, said people with knowledge of the matter.
Foxconn may partner TSMC and TMH to set up fab units: Foxconn is in talks with Taiwan Semiconductor Manufacturing Co (TSMC) and Japan’s TMH Group for technology partnerships to start semiconductor fabrication units in India, said people with knowledge of the development.
Vedanta and Foxconn terminated their joint venture to make semiconductors in India by “mutual agreement” to “explore more diverse development opportunities”. Foxconn has now told the government it wants to set up at least four to five semiconductor fabrication units in India, people aware of the development told ET.
News Updates
PhonePe Esop buyback: Flipkart makes $700 million payout to employees | Employees of e-commerce major Flipkart have received payments from a $700 million employee stock option buyback, group CEO Kalyan Krishnamurthy told in an internal email reviewed by ETtech.
Former SBI chairman Rajnish Kumar, ex-Infy CFO Mohandas Pai join Byju’s advisory council: Byju’s on Thursday said it has appointed former SBI chairman Rajnish Kumar and former Infosys CFO Mohandas Pai to its Board Advisory Committee (BAC) to guide and advise the crisis-hit edtech major on the composition of its board and governance structure.
Slowdown hits low-priced items in e-commerce: E-commerce sales volumes have grown by about 24% in the April to June quarter, data from Unicommerce showed. Demand continues to be soft for mass-market phones.
ETtech Deep Dives
Micropayments: Internet’s ‘sachet moment’ | Be it shelling out Rs 10 for a tarot card reading session online, Rs 50 for a quick online game or Rs 30 in virtual offerings at a temple, UPI-enabled micropayments are driving new-age users to consume and pay for a variety of services on the internet. For apps, this avenue for revenue generation means big business.
Isro’s talent base propels budding spacetech startups: Spacetech startups are increasingly relying on the ISRO for grey-haired talent, both on full-time and consultant roles, given the expertise the spacetech category requires.
What are down rounds and will they become the norm for Indian startups? A down round is when a privately held firm raises funds at a valuation lower than that ascribed in the previous round. ETtech answers some questions about down rounds and their increasing relevance in India’s startup ecosystem.
ETtech Interviews
Jobs scandal code of conduct violation, not systemic failure: TCS CEO K Krithivasan | The recruitment scandal at India’s largest software exporter Tata Consultancy Services (TCS) was a one-off code of conduct violation and not a “systemic failure,” said CEO and MD K Krithivasan, 58, in an interview with ET, adding that the incident was swiftly dealt with and has had no impact on relationships with clients.
There’s a fear of recession; all are preparing for downsides: HCLTech CEO C Vijayakumar | IT services clients are not out of their recessionary mindset yet, which is leading to delay in deal closures, C Vijayakumar, CEO and managing director of HCLTech, said after the $12.6-billion company missed profit and revenue estimates for the first quarter of 2023-24 due to weakness in ER&D and telecom spends.
Focus back on growth over profitability; no consumption slowdown yet: Swiggy’s Rohit Kapoor | Rohit Kapoor, chief executive of Swiggy’s food delivery business, said he had shifted his focus back to growth over the past few months, instead of profitability, which is what he’d chased since joining the firm nearly a year ago.
IT Corner
TCS Q1 profit rises 17% on-year, but outlook ‘soft’: Net profit for the June quarter at Tata Consultancy Services (TCS) advanced 17% on-year, beating street estimates, but India’s software bellwether warned that it lacks immediate visibility of a rebound in demand, which remains “soft and uncertain’’.
Also read | NITES files complaint with labour ministry over onboarding delays at TCS
HCLTech Q1 net profit up 8% to Rs 3,534 crore, misses estimates: HCLTech reported a 7.6% on-year rise in net profit for the fiscal first quarter, missing estimates due to project ramp downs mainly in its technology and telecom verticals, and fewer deal closures amid macroeconomic uncertainty.
Wipro’s Q1 net profit up 12% to Rs 2,870 crore, misses estimates: Wipro on Thursday reported a quarter-on-quarter fall in its net profit and revenue for the first quarter ended June due to weakness in its key verticals, like financial services and communications. It too reported that clients were postponing discretionary spends in the short term.
Slow tech spends hit IT staff’s wallets: The slowdown in tech spending that’s dented the fort- unes of the $245-billion Indian IT industry has hit the 5.1 million people it employs. They’re facing the heat in the form of deferred hikes and reduced variable pay alongside delays in onboarding hires.
Tech Policy
Digital personal data protection bill to be tabled in parliament: The government has listed the Digital Personal Data Protection (DPDP) bill for passage and consideration in the Lok Sabha, according to an official notification.
The government may lower the age of users who can give consent under the proposed digital personal data protection law to 14 years, shows a draft of the bill seen by ET.
Trai’s proposal to regulate OTT concerning, may end encryption: Experts | Over-the-top (OTT) communication services like WhatsApp, Signal or Telegram could be “over regulated” with the threat of encryption being compromised, said technology policy experts after the Telecom Regulatory Authority of India (Trai) proposed to regulate such services in its consultation paper released last week.
Fintech News
Indian fintech regulatory companies make a mark on the global stage: Indian software companies have been exporting their services the world over for years now. Joining the bandwagon is a new breed of tech startups that offer regulatory-related services to financial institutions.
Lending platform Yubi valued at $1.5 billion in secondary sale: Digital lending platform Yubi, which is set to separate from parent Vivriti Capital, has been valued at $1.5 billion following a secondary share sale, two people in the know told ETtech. Chennai-headquartered non-banking finance company Vivriti Capital currently owns just under 50% of Yubi.
Zomato temporarily halts UPI rollout for new users: The Gurugram-based company, which has partnered with ICICI Bank to offer the service, confirmed that Zomato UPI has suspended onboarding new users, but said it is available to existing users.
ETtech Deals Digest
Deal size thinned to double-digit millions in technology startup funding this week. Early-stage deals dominated, in volume terms, with a significant chunk of them in vertical technology categories or niche-focussed ventures.
.jpg "Newsletter_03 (1)")
Startups managed to raise only $55 million across 16 funding rounds during the week of July 8 to 14, a decline of 89% over the same period last year, when they raised $516 million across 65 rounds, according to data provided by market research firm Tracxn.
Funding activity was down 84% sequentially. The previous week of July 1 to 7 saw $350 million deployed across 23 funding rounds.
As expected, there were no investments in late-stage startups this week. However, early-stage startups received $33.3 million, while seed-stage startups secured $21.6 million.
For all the latest Technology News Click Here
