A key task for the new government would be to provide clarity on the much-needed regulations for the online gaming sector, besides resolving the higher goods and services tax (GST) issue — especially related to retrospective tax notices — policy experts and industry representatives said.

Even as the retrospective taxation issue involving over Rs 1.5-trillion GST demand by the government from gaming companies is pending for hearing before the Supreme Court, the gaming firms want the new government to roll back the higher GST rate of 28% on deposits.

This is because many companies, which in the pre-revised GST era were sitting on margins of up to 30%, have now started seeing negative margins in the absence of passing on the burden to users.

According to industry estimates, since the GST amendment in October 2023, the government may have collected GST of around Rs 10,000 crore till May, a staggering 430% increase compared with GST collections before amendment. For companies, about 40-75% of their revenues is going towards GST payments.

“If the current tax rates and policies continue, we anticipate a wave of consolidations and potential shutdowns of smaller companies unable to sustain the financial pressure,” said Roland Landers, CEO of All India Gaming Federation (AIGF).

AIGF represents companies like First Games, Mobile Premier League, Winzo, Nazara, Baazi Games, Gameskraft and Zupee, among others.

“Stability in the sector is expected to be restored only when there is clarity regarding both prospective taxation policies and the resolution of retrospective notices issues to companies,” Landers said.

Before October last year, online gaming firms have been paying 18% GST on the platform fee, which is the commission they charge from the participants entering a game. The GST Council has revised the rate on online gaming to 28% on full face value or deposits made by the participants to play games, effective October 1, 2023.

In fact, as a clarification for the retrospective GST collection notices, the government had said the GST rate on gaming was always 28% on full face value and there was no distinction between games of chance and skill.

“We are not looking at passing the GST burden to users in the near term as we fear the users will shift to competitors. This can only be done if every company starts passing the burden at the same time,” said an executive associated with a gaming company. In a bid improve their profitability, the companies are currently finding newer ways.

Some of these include discouraging instant withdrawals and focusing that the GST bonus given back to players remain in the system to an extent possible. This also includes thinking models around levying a payment gateway charge if a small amount is withdrawn by players.

“Marketing and GST burden are the two key expenses we have at the moment. To improve profitability, a way is to cut marketing spends but that would affect the topline because then attracting new players will be difficult,” another executive said.

Gaming regulations

A Sebi-like regulator and clarity on a code of conduct for the sector is the key ask of the industry from the new government. The manner in which the notified rules will be implemented, a framework for responsible gaming and player protection, architecture on checking financial frauds, and gaming certification, are some of the areas on which the industry needs a clear roadmap.

“After releasing the rules, the government is just not going ahead with actionable points of recognising SROs (self-regulatory organisations), releasing already submitted parameters to distinguish the game of skill from that of chance,” said Aruna Sharma, policy adviser and practitioner development economist.

“These trigger points will enable for online gaming industry to formally register and SROs to make peer groups abide by a self-drafted regulator-compliant code of conduct,” Sharma added.

Anuraag Saxena, CEO of E-Gaming Federation, said: “The rapid growth (of online gaming industry) necessitates a progressive regulatory framework that ensures sustainability, consumer protection, and safe play.”

“We are optimistic that the new government will foster an enabling environment for this emerging sector through clarity around taxation and regulation that will help create a sustainable gaming environment and facilitate industry growth,” he added.

EGF represents companies such as Games24x7, Head Digital Works and Junglee Games.

On April 6, 2023, the ministry of electronics and information technology (MeitY) amended the IT Rules, 2021, to incorporate regulations for online gaming. The regulations were aimed at banning games involving betting or wagering as an outcome. Through the rules, the government also laid out the structure of SROs that will determine whether a real-money game is permitted to operate in the country or not.

Its been over a year but the implementation of the regulations has not happened owing to likely change in stance of the government on implementation of SRO model, which was industry dominating, as per the officials.

According to EY, the online gaming market grew at a 28% CAGR (compound annual growth rate) from FY20-23 to Rs 16,428 crore. The industry is projected to maintain a 15% CAGR till FY28.

However, the real money gaming segment, which accounted for 84% of the online gaming market share, in FY23, might see its share decreasing to 75.4% by FY28, due to the recent GST changes.