India’s Real Money Gaming Tax

India’s GST Tax on Real Money Gaming

In July 2023, the Indian government announced a 28% tax on online real money gaming (RMG) companies (Reuters). While we remain excited about the opportunity for gaming in India (tailwinds for the Indian gaming market), this new tax that recently went into effect on October 1st 2023 puts significant pressure specifically on the profitability of RMG opportunities in the region. In recent history, RMG has been a highlighted success story of the Indian gaming ecosystem and wider Indian startup landscape. 
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In this newsletter, we will break down the history behind the new tax, the motivations for it, and its impact on the industry (today and in the future).
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Here is the timeline of what happened: 

MeitY Crackdown (Jan, 2023)

In January 2023, the Ministry of Electronics & Information Technology (MeitY) of India proposed new rules for more stringent compliance and know-your-customer (KYC) regulation, banning of credit financing for users, and the creation of self-regulatory bodies for online RMG companies. After deliberation, these rules were formally adopted in June 2023. 

This scrutiny was driven by concerns around the addictiveness of RMG and the associated potential negative societal impacts. The ministry also purposefully makes no distinction between games of chance and games of skill, a marked difference in regulation from what the broader RMG industry experiences in most other countries (TechCrunch).

28% GST Tax (July, 2023)

In July 2023, the Indian Goods & Services Tax (GST) Council announced a 28% tax on online real-money gaming companies (Reuters). This tax is taken on the total amount deposited into a player’s account (i.e. if a player deposits $100 in their account, $28 of this has to go to the government).

For context, this is the highest tax levy the GST Council imposes. Similarly to the MeitY, the GST Council made no distinction between games of chance and games of skill, which allowed many RMG companies to operate without heavy taxation (TechCrunch). Before this announcement, RMG operators only paid an 18% tax on revenue from the fees charged for offering real money games (Reuters, Economic Times).

Pushback from RMG Community (July, 2023)

Following the 28% tax announcement, operators, trade bodies, and investors in the Indian RMG space publicly denounced the move and wrote joint letters to the government authorities pleading for a reconsideration. Virtually all RMG companies have been affected, which include some of the largest Indian startup success stories: Dream11, Gameskraft, First Games, Mobile Premier League, Winzo, Rummy Circle (Games24x7), and others.

The initial press release from the GST Council stated the 28% taxation would be levied “on the full value of the bets placed” for online gaming (GST Council). In one letter from 30 investors and companies (including Tiger Global, Peak XV - formerly Sequoia India) to Prime Minister Narendra Modi, they outlined three different potential interpretations of the rules wording and associated tax implications (TechCrunch):

1. If “full value of bets” is understood in a manner where GST is levied on every contest played every time with fully taxed winnings, the GST burden will increase by 1,100% and on account of taxation of redeployed player winnings, the same money will get taxed repeatedly resulting in a scenario where over 50-70% of every rupee will go towards GST , thereby making the online real money skill gaming business model unviable. This will lead to write off of investments made and would hurt the investor confidence.
   
   
2. If “full value of bets” for the purpose of levy of GST on online gaming is the full deposit value i.e. deposits made by users and not taxed again if the winnings are redeployed to play a game (at par with casinos), there will be a 350% increase in GST burden. This will result in the closure of most gaming startups and will require major restructuring across the industry to survive. Importantly, as deposits for online games are digital and made via authorised payment channels, it would allow GST authorities to track and verify all GST filings and remove any scope for manipulation by unscrupulous actors.
   
   
3. If 28% GST is to be levied on the Gross Gaming Revenue (GGR)/Platform fees, there would be a 55% increase in GST quantum. This would ensure that the Indian online gaming operators are able to survive and are able to be a key contributor to the Indian economy. In addition, such a suggestion of levying GST on GGR would be in line with internationally accepted and proven practices.

Slight Walk Back of the Tax Implications (August, 2023)

Following the industry backlash, in August 2023 the GST Council provided clarity that tax would be imposed on the amount “deposited with the supplier, by or on behalf of the player” and “not on the total value of each bet placed” (GST Council). This is interpretation B from above; though not as drastic as repeated taxation on every contest, the tax is still significantly onerous. 

Job Cuts and Industry Pullback (August, 2023)

The 28% deposit tax puts significant pressure on the business model and profitability for RMG companies. As such, many companies have had to adjust operations and cut staff to manage the impact. In August 2023, MPL reduced its staff by 50%, ~350 people (Economic Times). A number of other RMG startups have done the same and some have halted operations altogether (Entracker). Dream11 apparently cut EBITDA forecasts for 2023 by ~80%, from $350-400m to somewhere under $100m (The Arc). 

On the other hand, Winzo has started to expand their operations to other regions, in particular, Brazil (Inc42). From our conversations with investors in India, it appears the vast majority of RMG startups and established companies are all struggling with the new tax burden and the excitement for new investments in this category has pulled back sharply.

Tax into Effect (and Continued Confusion) - (October, 2023)

On October 1st, 2023, the 28% deposit tax officially went into effect and a number of the larger RMG operators have already received notices for payment. However, some 15 Indian states have not fully adopted the new GST rules, causing confusion and the potential for double taxation (Economic Times). Additionally, it is unclear whether the 28% GST tax will be applied retroactively to the period before October 1st, which will likely need to be litigated and determined by the courts. The GST Council ruling also outlines a review of the tax six months after implementation, in March 2024, which leaves open the possibility of revision (Moneycontrol).

MEITy has also deferred the initial plans to form self regulatory bodies until there is “harmonization” of the views from various ministries, which highlights the lack of clarity and cohesion from the government on the laws, regulation, and taxation of the RMG space (Economic Times). 

Takeaway: While we remain bullish on the overall gaming ecosystem in India, RMG has taken a significant hit with this new 28% deposit tax. The Indian government certainly has the right to impose high taxes and heavily regulate industries that may pose societal risks, but clarity and unified action is needed to ensure ease of doing business for operators and to dampen investor fears. Right now, confusion abounds and different authorities are not fully aligned on how to implement this new tax cohesively. It is also very unclear whether or not, and to what extent, the tax rules will be revised further in the future.

We expect the RMG industry in the country to continue to fight these regulations, both in and outside the courts. The Indian government bodies, meanwhile, will assess the tradeoffs of additional consumer protections to the economic pullback for RMG as an industry before making additional changes.