Is Online Gaming Industry in India on the Brink of Extinction?

From playing platform games like Mario on our computers to spending hours playing online games on mobile phones, we have come a long way. Almost 1/3rd people in the world have a hobby of either fighting battles in games like PUBG or trying their luck on betting game platforms like Rummy. The rest of the population frowns upon this lifestyle choice and wonders why anyone would spend money and time on mere video games. But, the craze of online games is here to stay and will only increase rapidly with time.
 
The gaming industry, both online and offline, is a big arena today. The global gaming market in 2022 was $249.55 billion and is estimated to reach $665.77 billion by 2030. Asia Pacific, which includes countries like India, China, Japan, Korea, Bhutan, Bangladesh etc., is the continent with the largest and fastest-growing gaming market.

Likewise the Indian gaming market is increasing with astounding speed and is estimated to grow at a CAGR of around 28.5% by 2029. The graph below represents a clearer picture of this industry in India.

But, with the announcement from the Union Ministry of Finance on July 11, 2023, there have been "not-so-silent" whispers of the possibility of the online gaming industry seeing an untimely demise. With the Indian Finance Minister's declaration of the GST hike from 18% to 28% for online games, casinos, and horse racing on July 11 2023, people have been concerned. Panic selling even led one of the biggest casino companies, Delta Corp Ltd, to lose share value.

Many believe that the games will become costlier than before as well as investments in the industry will also suffer drastically. So, what exactly would be the endgame for the gaming industry? Will the expert predictions come true?

Let’s check that out and more revolving around the online gaming industry in India in this article.⬇️

The Beginnings and The Happenings

Before diving into the financials and outcomes, let me give you a short review of how the gaming industry came to be and what it entails.

The birth and rise of the online gaming sector in India can be dated back to the 1990s and early 2000s when games were played on dial-up modems. Star Trek-inspired MegaWars was an advanced example of games prevalent in those times.

High-speed internet connection and technological advancement have made it possible to play games on even mobile phones with no glitches whatsoever. Without any barriers and limitations. Plus the games have adopted a story-type interface to keep the players engaged and wanting more.

Diversity in tastes is a crucial defining factor behind the tremendous and rapid growth of the online gaming industry. Whether you like to play skill-based games like Solitaire and Sudoku or wish to test your luck with chance-based games like Poker, options are unlimited. After all, that is what the internet is all about, right?

Another factor which unveiled these games to people of all demography and interests was the pandemic. The lockdown led to people indulging in fun activities to pass the time. People started playing online games like PUBG, Rummy, Ludo, Poker, etc., with family and friends from around the globe. This fun time helped people keep sane during difficult days as well as allowed them to feel closer virtually.
Just compare the data of the number of digital gamers from 2017 to 2023; the rapid increase in gamers numbers will help you understand the gaming industry's potential in the future.

GST Hike In The Online Gaming Industry

July 11 2023 will be marked as the day when the online gaming industry was shaken to its core. The 50th GST Council meeting decided to enforce taxation of the online gaming sector by adopting a 28% GST rate for the face value of all transactions in online games. The GST Council is a constitutional body which makes recommendations based on issues related to the implementation of Goods and Services Tax.
The topics chosen to be discussed for this meeting were:

• Taxation.
• Online Gaming.
• Enhancing regulation for registration & claiming the input tax credit.
• Defining Utility Vehicles.
• GST rates are applicable on food and beverages sold in multiplexes, etc.
• Exemption of GST on import of food for special medical purposes used in the treatment of rare diseases.

When it comes to the gaming sector, a major change was made that placed a big blow on the online gaming industry. It was announced that 28% GST would apply to online gaming, horse racing, and casinos as per the Schedule III GST Act. This means that online gaming, casinos, and horse racing would be included as taxable actionable claims along with betting, gambling, and lotteries.

This announcement by the finance minister immediately led to a bombardment of questions from journalists present in the press conference. Many had questions about the timeframe of the new GST rates applicability whereas others queried the state of the gaming industry with GST hikes. The GST Council, including Nirmala Sitharaman, replied to the questions revealing important details about the GST hike.

Here is a short list of key getaways to know about the changes the online gaming industry is bound to face with the GST hike:

• The decision was made based on the recommendation by the Constitution of Group of Ministers (GoM) banded in 2022. After this decision, 28% GST will be applicable to the face value of the bets placed in the case of online gaming.
• Prior to this announcement, 18% GST was applicable to skill-based games, whereas 28% GST was applied to chance-based games. This was applicable to the winnings of the game. Thus, the taxation of the overall gaming industry to 28% GST has removed any distinctions between skill and chance when it comes to online gaming.
• The decision was undertaken with a voting procedure that requires a supermajority of ¾ of the members present and voting, with the votes weighted such that ⅓ of the total weighted votes are cast by the centre and ⅔ are cast by the states.

This decision raised hell in the online gaming industry with big allegations from many "someones" in the sector, stating claims like "the government is trying to kill the industry", to the GST hike being "unconstitutional", "irrational", and "egregious". This leads us to the main context of our article, whether the claims made by the so-called experts of the industry regarding the Indian government's decision are correct.

What to Expect As An Investor After 28% GST Hike From the Online Gaming Industry?

When it comes to finances, the gaming industry has definitely suffered from the government's decision to uphold the 28% GST application. Businesses claimed this decision to be the apocalypse that would shut down their doors forever. Yes, the share market showed a drastic dive with the increase in taxation amount. Just check out the 5-day price chart of highly-profitable gaming companies like Delta Corp Ltd. and Nazara Technologies Ltd. As you see in the image below, the share price of Delta Corp Ltd. took a straight dive from ₹246 on July 11 to ₹184 on July 14, 2023, which is around 27% loss in just four days.

Also, check out our Delta Corp Stock Review

The straight tanking of the stock price showcases the level of uncertainty and distrust investors feel in the online gaming sector, and the many comments from experts in the sector don’t help either. This statement made by Ms. Shivani Jha, Tech Policy Lawyer and Director, EPWA (E-Gamers and Players Welfare Association) will enlighten you to the industry’s opinion on the matter.

"This development indicates an increase from 1.8 rupees per 100 rupees spent on a game to 28 rupees on per 100. This will not only discourage players from playing, the professionals for whom its a livelihood will be burdened by taxation. It may also force them to play on offshore platforms, and the whole vision of creating a digital progressing gaming ecosystem seems blurry at this point." (sic)

That's not all! The series of similar questions began the moment the finance minister announced the changes in the GST Council meeting. A reporter asked about the union ministry's view on how this decision could kill the gaming industry. To which Nirmala Sitharaman gave a practical answer of how the government has no intention of "finishing" the gaming industry.

To understand how the government's decision would not infact end up killing the rapidly prospering gaming sector, one needs to look from a different perspective. This perspective would prove that the GST hike in online gaming and casino would be, in no manner, a cause for the industry's downfall.

The one thing many concerned people don't know about is that the Indian government never hid their wish to put an overall 28% tax as bet value. They discussed this matter for around a year and then decided to simplify the decision by levying a fixed tax rate on every gaming segment. This way, the sector can be regulated properly. It would also avoid tax defaults, like the one GamesKraft Technologies was alleged to have done. Removing the loopholes will help the government manage the sector with much ease.

The hike from 18% to 28% also makes sense, as several relatively essential items in the food sector come under the 18% GST slot. At first, the gaming sector was not properly regulated, and the 18% tax was levied only on certain categories. In the GST Council meeting, The Finance Minister clarified how levying a 28% tax on the online gaming industry is the right decision by comparing it with the tax levied on the food sector. The food sector contains items with a 5% to 18% tax slabs. Since food is essential, levying the same percentage of tax on it and games was not practical.
Even die-hard gamers can't argue that food is more important than games, which means it won't make sense to tax it equal or less than an edible.

As per Invest India, the Indian gaming industry raised $2.8 billion from domestic and global investors combined in the last 5 years. This proves the prediction of a drastic reduction in investments in the online gaming sector as a moot point. People who love these online games and who have earned profits from indulging in games like Rummy and Poker would not avoid the sector altogether due to slight price hikes. Companies can manage this change by making accurate adjustments in the features and services they offer to their clients.

As for investors, the industry is highly profitable and has bright days in the future with the advancement of technology. Just check out this infographic on how rapidly the online gaming market has increased in India.⬇️

Yes, the companies in the gaming sector are facing troubles with the GST hike, but this is a temporary change and will stabilise with time. This decision also helps the government to regulate the sector better so that there won’t be a repeat of the fiasco GamesKraft Technologies spread in September 2022. Hence, the change of GST rates from 18% to 28% will not be the end of the world for the gaming industry.

The Bottom Line

We humans, whether Gen Zs or Millenials, are always on the lookout for something unexpected, and that is what the gaming industry is banking on. Unlike earlier times, just having fun is not what gamers are looking for. The concept, design, genre, and even the endgame, i.e. the winning prize, are processed for months before going ahead with the game’s development.

For an industry with so much potential, a mere 10% increase in GST rates won’t be the reason for the downfall. The revenue might be affected by the gaming startups as well as stock prices of big gaming companies may see a dive, but the industry overall will continue to reach its estimated target as predicted by the experts. So, instead of focusing on what the business associates and management are commenting on the GST hike, investors should pay attention to the ”behind the scenes” as well. After all, in the finance world, not everything is how the companies portray it.

If you're curious about the challenges surrounding GST, check out Shortcomings of Goods and Service Tax.
Also Interested in a deeper look at GST? Read our Critical Analysis of GST Slabs in India.