The online gaming industry in India has experienced significant growth in recent years. Propelled by factors such as widespread smartphone penetration, enhanced internet connectivity, a young tech savvy population, and heightened awareness, India is the second-largest market for online gaming globally, in terms of user base. The online gaming industry has had growth in the country, recording a compound annual growth rate (CAGR) of 28% over the last three years to reach Rs 16,428 crore in FY23 as per a EY report, titled ‘New frontiers – Navigating the evolving landscape for online gaming in India.’ This growth trend for this sunrise sector is now in the throes of an existential crisis due to an uncertain regulatory regime, increased GST burden, and the prospect of ‘retrospective’ taxation.

In August 2023, after extensive deliberations for over two years, the GST Council changed the GST on online gaming companies. Announced during the 51st GST Council meeting, amendments to GST laws were made to specify that Real-Money Gaming (RMG) platforms would be taxed at 28% on full-face value of deposits rather than 18% on the gross gaming revenue (GGR) that was being paid by the platforms earlier. The impact of the GST changes and the retrospective tax was visible almost immediately as it had a domino effect on the entire sector. Various companies were forced to lay off staff even as investments into the sector suddenly went dry.

It was miraculous that the entire online gaming industry managed to comply with the new mandate despite the severe challenges. Not surprisingly, many companies had to re-evaluate business strategies and reinvent their operating models. In fact, companies have even chosen to absorb the GST impact, rather than pass it on to the users. This was probably necessary to prevent users from migrating to the many fly by night online gaming operators who were obviously not constrained by GST or any other compliances.
As per the EY report, industry estimates suggest that the online gaming sector in India has the potential to reach Rs 33,243 crores in FY28, showcasing a CAGR of 15%. Of this, the RMG segment constitutes a substantial part, almost 83% of the market share in 2023. Industry estimates also suggest that the RMG segment will contribute around Rs 6,500-6,800 crore as direct tax revenues, and Rs 75,000-76,000 crore as indirect tax revenue (GST) to the exchequer during FY24−28. The report also highlights that the industry attracted consistent foreign and domestic investments amounting to Rs 22,931 crores between 2020 and 2024 and was even expected to create as many as 250,000 jobs by 2025, but these numbers are now all contingent upon the gaming industry’s survival! As online gaming companies continue to experiment with their business models and absorb the GST burden to retain users and sustain operations, time will tell if the projected industry numbers are met.

Even now, the very existence of India’s entire online gaming industry is in question owing to the slew of retrospective tax demands made to over 70 online gaming companies amounting to a staggering Rs 1.12 lakh crore. It is estimated that this number may well reach over Rs 2 lakh crores if penalty and interests are included. This also creates a significant competitive disadvantage for India online gaming companies, since none of the offshore platforms have registered as mandated in the new amendments, which would make enforcing any such retrospective taxes on them difficult. This is currently sub judice under the Supreme Court. Meanwhile, the entire sector continues to remain in a state of uncertainty as they await the outcome.

The GST Council’s intent as outlined in the press releases subsequent to the amendments was clearly to increase the effective tax collection from the online gaming industry, keeping in mind the viability of the industry and simultaneously protect government revenues. Based on global learnings, the GST Council has decided to levy 28% on every deposit. According to estimates by EY, the potential GST revenues in the next five years under the new regime is Rs 75,000 crores which is three to four times higher than the previous regime. This could be the sweet spot where the industry continues its growth while also contributing significantly to the government exchequer. However, the industry’s ability to contribute to meet the retrospective tax demands for past periods where tax was not collected from customers, will only jeopardise this intent of the government, especially since the total revenues of the sector are only around Rs 16,000 crores. Instead of increasing tax collection, the insistence of retrospective taxation may lead to bankruptcy of the entire industry. This kind of retrospective taxation, or any regulation for that matter, is a sure shot way of moving from a win-win situation to a loss-loss situation! The GST Council must pause and consider this and revaluate its stance on retrospective taxation. This way, the sector will continue to grow and the government will also be able to safeguard future tax revenues.