Title: The Impact of India’s New Taxation on Online Games: A Threat to Industry Growth
Introduction:
India’s online gaming industry is facing a major existential crisis due to the introduction of a new tax regime by the Goods and Services Tax Council. This move has led to a significant outcry from both global and Indian investors, who argue that the onerous tax regime will result in write-offs of $2.5 billion and the loss of 1 million direct and indirect jobs. In a letter to Prime Minister Narendra Modi, these investors express concerns over the unintended consequences of equating the legitimate online skill game industry with gambling. They emphasize the potential benefits of the gaming sector, including highly skilled job creation, foreign investment, and innovation in areas like animation and artificial intelligence.
The Rise of Online Gaming in India:
Online gaming has emerged as one of the fastest-growing consumer internet businesses in India. With the increasing popularity of fantasy sports and real-world sports betting, startups in this sector, such as Dream Sports and Mobile Premier League, have collectively raised billions in funding. These companies have played a crucial role in transforming India into a hub for gaming innovation and have contributed to the country’s net export of gaming expertise.
Investors Fear Loss of Investments:
The recent decision by the GST Council to impose a 28% levy on online gaming’s full face value at entry points has sparked concerns among investors. They argue that this tax regime will severely impact the gaming industry, resulting in significant write-offs of capital and hindering future investments. Dream11, a leading fantasy sports startup, has projected an 80% decline in its EBITDA due to the new rule, highlighting the potential financial losses companies may face.
Arguments Against the New Tax Regime:
In their letter to Prime Minister Modi, investors outline three key areas of concern regarding the new tax regime:
A. Taxation on every race played: Investors argue that if the GST is collected on every race played with fully taxed winnings, the burden will increase by 1,100%. This would make the online skill game business model unviable, leading to the cancellation of investments and eroding investor confidence.
B. Taxation on deposits: The imposition of a 350% increase in the GST charge on the total value of bets, considering the full value of deposits made by users, would be detrimental to gaming startups. This approach would require significant restructuring across the industry to survive. However, it would also allow GST authorities to track and verify all GST deposits, minimizing the potential for manipulation.
C. Taxation on Gross Gaming Revenue (GGR): Levying a 28% GST on GGR or platform fees would result in a 55% increase in the tax burden. While this might ensure the survival of Indian online gambling operators and boost the economy, it is crucial to align such a suggestion with internationally accepted practices.
Potential Consequences and Solutions:
The adverse impact of the new tax regime on the gaming industry is evident. The risk of massive loss of investment and job cuts could hinder India’s vision of becoming the gaming capital of the world. Considering the strategic importance of this sector, it is essential that the Indian government:
1. Revisits and reconsiders the GST Council’s decision by engaging with industry stakeholders and understanding the unique dynamics of online gaming.
2. Provides clarity on the distinction between gambling and legitimate online skill games to foster a favorable environment for investment and growth.
3. Collaborates with industry experts and international gaming associations to establish fair tax policies that encourage investments and boost the economy.
Conclusion:
India’s online gaming industry is at a critical juncture due to the new tax regime imposed by the GST Council. Global and Indian investors have voiced their concerns, highlighting the potential devastating impact on investments and job losses. It is imperative for the government to reassess the tax structure, differentiate between gambling and skill-based games, and collaborate with industry experts to create a conducive environment for growth. By striking the right balance, India can become a global leader in the gaming sector, attracting investments, boosting the economy, and fostering innovation in related fields.
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Image credits: SAJJAD HUSSAIN/AFP/Getty Images
Tiger Global, DST Global, Peak XV, Steadview Capital and Kotak Private Equity are among the global and Indian investors who have called on Prime Minister Narendra Modi to reconsider India’s stance recently announced taxation on online gamesstating that the “onerous tax regime” will lead to $2.5 billion in write-offs and 1 million direct and indirect job losses.
The Goods and Services Tax Council, which comprises top federal and state finance ministers, said earlier this month it had agreed to impose a 28% levy at entry points on the full face value for online gaming.
The GST Council’s decision has “an unintended consequence of equating the constitutionally protected legitimate online skill game industry with gambling, betting and other ‘gambling’,” a group of 30 investors wrote in a letter to Narendra Modi, the Prime Minister of India, on Friday.
“We have invested in this sector with the vision of making India the gaming capital of the world, which would help generate, among other things, highly skilled jobs, billions in foreign capital, and make the country a net exporter of innovation in games and related areas such as animation, artificial intelligence and visual effects,” the letter reads.
Online gaming is one of the fastest growing consumer internet businesses in India. Fantasy sports startups – including Dream Sports, backed by Tiger Global and Alpha Wave Global and valued at over $8 billion, and Sequoia India-backed Mobile Premier League – have collectively raised billions as a generation of internet users have gotten into the habit of betting on real-world sporting events in hopes of making money. This latest Friday gives online gaming startups in India a $20 billion corporate valuation.
Friday’s letter follows more than 125 companies warning New Delhi that the sector is facing an existential crisis and could suffer a massive loss of investment due to the Goods and Services Tax Council’s decision. Dream11, the leading fantasy sports startup in India, expected an 80% decline in its EBITDA following the new rule, India’s Arc news agency reported earlier.
“The current GST proposal will establish the most onerous tax regime for the gaming industry globally, which will lead to a potential write-off of $2.5 billion in capital invested in this industry,” Friday’s letter from investors said. “This will also negatively impact potential investments amounting to at least $4 billion in the next 3-4 years and hence the growth of the gaming industry in India.”
Through the letter, a copy of which was reviewed by TechCrunch, investors urged New Delhi to look into the following before implementing the new tax rule:
A. If ‘total value bets’ is understood in a way where GST is collected on every race played with fully taxed winnings each time, the GST burden will increase by 1,100% and due to the taxation of redistributed players’ winnings, the same money will be taxed repeatedly, resulting in a scenario where over 50-70%% of each rupee will go towards GST, thus making the online skill game business model unviable with real money. This will result in the cancellation of investments made and would damage investor confidence.
B. If the “total value of bets” for the purpose of levying GST on online gaming is the full value of the deposit, i.e. deposits made by users and not re-taxed if winnings are redistributed to play (at par with casinos), there will be a 350% increase in the GST charge. This will result in the closure of most gaming startups and will require a major restructuring across the industry to survive. Importantly, since deposits for online gaming are digital and made through authorized payment channels, this would allow GST authorities to track and verify all GST deposits and remove any possibility of manipulation by unscrupulous actors.
C. If the 28% GST is to be levied on Gross Gaming Revenue (GGR)/Platform Fees, there would be a 55% increase in the amount of GST. This would ensure that Indian online gambling operators are able to survive and make a major contribution to the Indian economy. Furthermore, such a suggestion to levy GST on GGR would be in line with proven and internationally accepted practice.
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