Tuesday, July 18, 2023

Save The Indian Onlone Skill Gaming Industry: 1 Million Indian Jobs, 400 Million Users And $2.5 Billion Investments

We are a group of 100+ Indian entrepreneurs, CEOs, and Industry Federations which are representative of leading Indian online gaming companies, that are trying to create a vibrant online gaming industry capable of competing globally. We believe that the online gaming industry will be one of the cornerstones of the Hon’ble Prime Minister’s vision of the $1 trillion digital economy.  

Online skill gaming, with a $20 billion enterprise valuation, $2.5 billion in revenue, and $1 billion in annual taxes, is set to grow by 30% CAGR to reach $5 billion in revenue by 2025. The total number of Indian online gamers grew from 360 million in 2020 to over 420 million in 2023. India’s gaming industry attracted FDI of about $500 million between 2014 and 2020, and over $1.5 billion between January 2021 - June 2022. The industry currently supports lakhs of direct and indirect jobs, and these numbers will grow substantially in the next few years.  

Further, the Central Government’s progressive initiatives such as the formation of the Inter[1]Ministerial Task Force (IMTF), change in Allocation of Business Rules to allocate a line ministry, and notification of the Online Gaming Rules which provide for a uniform national regulatory framework and clarity on direct tax (TDS) for online gaming, especially the progress made to differentiate between games of skill from games of chance, have been a major boost for the industry.  

Sir, the recent recommendation by the GST Council to club online skill gaming, a constitutionally protected activity, with betting and gambling, has left the industry in significant distress.  

The proposal to charge GST on the full Deposit Value will reverse the growth trajectory of the industry. This would potentially have devastating implications (including shut down of businesses) for MSMEs and startups that may not have the capital reserves to withstand such a sharp tax increase. Further, this decision will encourage illegal offshore gambling operators, drive Indian users to them and ultimately lead to neither optimal tax collection nor the growth of the legitimate industry.  

The online skill gaming companies provide a platform where players can compete in games of skill by paying a small platform fee. In the tech sector, a platform pays GST only on the portion of the service fee that it charges from a user, being the value of the service. The recommendation of the GST council to levy GST on the full deposit poses a significant threat to the industry’s success, gaming innovation and continuity.  

We highlight 8 core points that underscore the adverse impact of such taxation:  

1. Hampers the Digital India Initiative and Hon’ble PM’s Vision: The Hon’ble PM has on multiple occasions championed the online gaming industry and stated that India should be a leader in this space. Taxing online gaming to the point of unviability, contradicts this vision and hampers the government's efforts to promote Indian digital entertainment, technology-driven innovations and affects all the key mission mode programs including Make in India, Startup India, Digital India and AatmaNirbhar Bharat.  

2. Implications for Start-ups and MSMEs: The implementation of the recommendation of the GST Council will result in an unprecedented 400% - 500% increase in GST burden, which the industry will have no choice but to pass on to 400 million Indians. This will impede the growth potential of the industry and disproportionately impact the survival of a large number of MSMEs and startups.  

3. Impact on Jobs and Livelihoods: The industry employs around 1 lakh people through engineering, marketing, design, and research jobs among others. Additionally, it also supports lakhs of content creators, game streamers who belong to Tier 2 to Tier 5 cities. The growth projections of the industry envisage more than 5 lakh new jobs over the next 5 years. Any negative impact on the industry will lead to companies making cuts in their spending, a majority of which goes towards employing the Indian youth, thereby resulting in significant job losses.  

4. Impact on Consumer Affordability: The proposed recommendation will increase the cost of each game, significantly, for the users. The user, who is already required to pay 30% income tax on winnings, will be unable to bear such a large increase in cost and will shift to black market operators to avoid the increase in playing costs and reduction in the winning pool. This will result in the proliferation of the underground black economy and numerous criminal activities.  

5. Offshore Gambling Sites to be the Unintended Beneficiaries: The biggest beneficiary of such a change in the tax regime will be black market operators including illegal offshore gambling websites and nefarious unscrupulous elements. This will result in substantial tax loss to the government and will expose Indian gamers to harmful offshore gambling websites, which are not accountable to the Government of India.  

6. Stifling Foreign Investment and Global Competitiveness: Minister of Electronics and Information Technology’s (MeitY) decision to amend the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules to bring in online gaming intermediaries within its ambit was received extremely positively and would have resulted in significant FDI inflows. However, the imposition of GST on full value would debilitate potential investors, both domestic and foreign, from considering the online gaming sector in India as a viable investment destination. It may be noted that the impact will not only be on attracting fresh capital in gaming but would have a far wider impact on the Indian startup ecosystem as a whole, as the majority of these financial institutions invest across sectors and a favourable regulatory landscape is one of the single most important drivers for FDIs. In addition, the current $2.5 billion plus in investments is at stake basis this decision.  

7. Losing Opportunity to become a Global Gaming Leader and Impact on Exports: India currently has only 1% of the global gaming market share while USA and China have 23% and 26% market share, respectively. However, over the last 5 years, with over 8 billion mobile game downloads annually, India is clocking the highest number of game downloads globally. US and Brazil are a distant second and third with 5 billion downloads each. This is an extremely unique opportunity where India is ahead of every country by a great distance and can emerge as the hottest global gaming powerhouse. By imposing a fatal GST rate, India would lose such a rare and remarkable opportunity of becoming a global gaming leader.  

8. Long Term Net Revenue Loss for the Exchequer: An increase in indirect taxes via GST by 400% - 500% will result in the permanent eradication of profits in the Indian online gaming industry, thereby reducing taxes sharply, leading to a long-term unintended consequence of revenue loss for the exchequer.  

Sir, currently, the industry is paying 18% GST on GGR/ Platform Fee. An increase of GST to 28% on GGR/Platform fee will result in a 55% increase in GST quantum. Even though such an increase will be challenging for the industry, the industry supports this increase to be a contributor to nation-building.  

However, for the sector to survive, this tax should be levied on the platform fee/Gross Gaming Revenue that is earned by the industry. This is similar to any other technology service platform, where only the revenue that platforms earn are considered for the purpose of levy of GST. The industry stands in unison to request a viable and progressive GST regime and appeals for reconsideration of the current recommendation.  

A predictable, stable, regulatory framework and supportive taxation policies will allow the industry to compete on the world stage. This will also provide confidence to the investors and entrepreneurs who want to ‘Create in India’ and take ‘Made in India’ games to the world and usher in a vibrant democratised game development ecosystem.  

We sincerely hope that the above request is considered positively in the interest of protecting India’s nascent and high growth potential online skill gaming industry.  

We would be grateful for an opportunity to discuss this representation in detail with your good offices at the earliest and submit any additional information in this regard.  

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