Signs of Stability Emerging from a Precariously Shifting Landscape

30 Jan 2024

Ever since the Union Minister of Finance Nirmala Sitharaman promised in May 2023 to deliver clarity and predictability, and hence stability and prosperity, to India’s homegrown online money gaming sector, the industry has plunged into turbulence, troubles, and even existential threats.

“Once the policy certainty arrives, taxation becomes more … clear, it will attract investors,” the FM said. Still, the transition period between what was before and what lies in the promised future has been proving rather perilous so far.

Yet, esteemed market analysts project continuous, albeit adjusted, growth for the industry in the next few years, and the first benefits from stability might be on the horizon.

Not Everyone Will Make It: Cash Will Run Out

Gaming industry bodies have been shouting warnings for years that increasing the GST burden multifold would not only break the sector’s business model and halt its growth but also force many businesses to close down or move their operations underground.

Thus, when the GST Council finally decided to equalize the GST levy on online games, casinos, horse racing, and lottery to 28% over the full ticket value at its 50th Meeting held on the 11th of July 2023, it could easily be expected that not all existing and planned gaming businesses would survive such a hike, especially when coupled with the fundamental regulatory transition undertaken by the IT Ministry.

Now, around four months after the corresponding amendments to the GST Acts came into force on the 1st of October last year, it is getting clearer what the actual mechanism that might soon kill off a large portion of India’s gaming startup population is likely to be: their cash will run out.

The First Victims are Already Known

Image credits: Petr Kratochvil.

While some of the smaller operators like MPL-backed Striker, Hike, and Spartan Poker already shut down following the hikes in GST and direct tax levy for online games and virtual digital assets (VDA) amidst mass layoffs across the whole industry, the biggest actors on the stage – gaming unicorns Dream11, Mobile Premier League (MPL), and Games24x7, started absorbing the GST impact by offering discounts to players instead of passing the new tax burden to them immediately after the updated GST regime became active.

Other gaming giants, like listed games of chance and poker operator Delta Corp, opted to sit and wait to see how things would go. Following two months of depleted revenues, the company copied the move of the skill gaming unicorns and started discounting the tax to customers.

“As expected, before even playing the first bet, you are down 28%. This was something which a lot of customers didn’t see much value in,” the Group’s CFO, Anil Malani, said in a recent interview.

Following the correction in their business model in December, Delta collected more revenues than in October and November, but at decreased margins.

“We believe all the online companies now are actually following the same format, which is in some form or fashion they are compensating the players who are putting a deposit in their wallets in full,” Malani explained in another interview. “This, we believe, is not a sustainable model because the difference hits your bottom line straight away.”

The Delta Group, in particular, has strong cash reserves and expects a significant increase in casino capacity in the next couple of months. The company management hopes this will raise revenues enough to compensate for the GST burden and restore margins to a healthy level sooner rather than later, the company’s CFO revealed.

Platforms Covering Customer’s GST Cannot Go On Forever

“The GST hike hasn’t helped the industry but because we have been growing, our growth has sustained the business,” said Saurabh Chopra, co-founder of Baazi Games, another of the big gaming companies that feel strong enough to sustain the blow and survive until better times come around.

“We have not passed on the tax liability yet and the impact on the consumer is minimal. But the business needs to make sense and we do plan to pass on the tax burden to the customers and optimize it gradually and do it in a fashion that the consumer engagement is not impacted,” Chopra explained.

“We have not seen any major contraction and depletion in active gamer base…our loyal big-ticket customers are still playing online,” Delta Corp CFO commented on things from their end.

At the same time, online fantasy sports platform Dream11 announced it had onboarded 5,5 crore new customers in the turbulent year of 2023, reaching a total user base of 21 crore, more than two-thirds of whom hailing from tier 3 cities or smaller towns and villages.

If we’re not to worry about the survival of the larger actors of Indian online gaming, how many of the 400 or so smaller real money gaming (RMG) startups will make it through the hard times remains to be seen.

Pressed on the one front by the hiked GST burden, and on the other front by the big businesses that are prepared to run on cash reserves and offer discounts until necessary, this will soon turn into a war of attrition with lots of “consolidations” happening in online gaming startup space, as Delta’s CFO puts it euphemistically.

According to the latest report by EY, the changes in the GST regime will result in India’s online gaming industry lowering its CAGR (Compound Annual Growth Rate) from 28% registered in FY20-FY23 to 15% for the period FY24-FY28, while the RMG vertical will lower its relative share from 84% to 75%.

The report further projects that the RMG sector will still reach a size of ₹33,243 crore by FY28, having contributed direct taxes of ₹6,500-₹6,800 crore and GST of ₹75,000-₹76,000 by that time.

Thus, EY agrees with Union FM Nirmala Sitharaman that juicy prizes await those businesses that swim to the other shore in the next couple of years during the “consolidation” period. And the Government will receive the lion’s share of these prizes.

Government Might Back Up from Heavy Valuation Rule for Past Period

Union FM Nirmala Sitharaman.
Union FM Nirmala Sitharaman. Image credits: Stuart Isett.

According to high-level sources recently quoted by the media, the Central Ministry of Finance is considering circulating a clarification to exempt wagers from winnings on online games from GST levy for the period before the 1st of October 2023.

The so-called Entry-Level Rule was adopted in haste at the 51st Meeting of the GST Council, held urgently on the 2nd of August after the Ministry realized that taxing 28% on each subsequent bet was “very high,” but was supposed to apply “prospectively” for gaming transactions after the 1st of October only, as FM Sitharaman told Parliament in December.

At the same time, Ministry officials have confirmed that the Government has no intention to back up from its stance that gaming should be levied at the highest GST rate slab reserved for “sin” products.

“Industry is already aware of our stand. They want to pay at 18% on the gross gaming revenue (GGR) or the platform fee. The law already existed that they need to pay 28% GST on each bet placed, being a game of chance,” another top-level source stated to the media.

Nevertheless, the hints that the Government is looking for ways to relieve the gaming industry of the post-period tax demands amounting to ₹1,12,332 crore before the Apex Court considers the matter in detail might be interpreted as a good sign.

Google will Continue Working with India’s RMG Sector

Another good sign is Google’s announcement on the 11th of January this year that the global tech giant will continue distributing RMG apps for India in its Play Store for Android users beyond the end of the current pilot program.

The pilot allowing rummy and daily fantasy sports (DFS) apps was launched in September 2022 and was finally extended until the end of June this year. With the new development, the pilot will be replaced by a new system that allows for more game types with stakes.

“Based on the learnings from the pilots and positive feedback from users and developers, Google Play will begin supporting more RMG apps this year, including game types and operators not covered by an existing licensing framework,” a statement by Google said.

Considering this, and the fact that the Indian Government has not yet endorsed the proposed Self-Regulatory Organizations (SROs) and hence no games have been certified as “permissible online money games,” we might even see apps offering Andar Baharroulette, or other undoubtedly chance-based games being on offer.

“This decision will help with responsible innovation and provide a bouquet of choices to the Indian consumer. It will especially help MSMEs and new developers/platforms which will be able to compete with established companies, and will substantially bring down the user acquisition and other associated costs,” Roland Landers, CEO of the All India Gaming Federation (AIGF) commented on the news.

Even though it is hardly a direct consequence of India’s new tax legislation pertaining to online games, casinos, horse races, and lotteries, Google’s systematic support for the country’s sector wouldn’t have been possible without the approaching stability of the legal and tax front.