The Indian online gaming industry is expected to generate some INR140 billion ($1.68 billion) in taxes in the 2024-2025 fiscal year, and help create 150,000 additional jobs, a recent report estimates.
The report underscored that, while revenue generated from the online gaming industry in India is lower compared to China, the United States, Japan, and the United Kingdom, its growth rate in the past six years has been the highest, with a compound annual growth rate (CAGR) of 30 percent from 2017 to 2023.
Regardless, the recent decision to impose a 28 percent Goods and Services Tax (GST) on the full deposit value in India’s online gaming sector has sparked concerns about its negative impact on the market’s development.
The study, developed by the EGROW Foundation and Primus Partners India spotlights the remarkable expansion of India’s online gaming sector and its main challenges, forecasting that the industry’s revenue will soar to $2.4 billion by FY2029, marking a robust CAGR of 20 percent from 2017 to 2029.
The online gaming sector’s contribution to GDP has surged, with a 27.5 percent CAGR from 2019 to 2022. Fiscal gains from this boom include INR16 billion ($191.6 million) in GST collected from gaming companies in FY 2022-23.
For the fiscal year ending March 31st, 2024, INR75 billion ($897.5 million) is expected to be collected from the tax, with INR35 billion ($419 million) generated in the October-December quarter alone. Looking ahead, India anticipates collecting up to INR140 billion ($1.68 billion) in GST from online gaming companies in FY 2024-25.
The sector’s attraction for investors remains strong, drawing INR15,000 crores ($1.8 billion) in FY2022. Expectations are high for an increase in foreign direct investment, targeting INR25,000 crores ($2.99 billion) by the close of FY2024.
Currently, the industry employs 100,000 individuals, with an optimistic outlook of creating an additional 150,000 jobs by 2025, fostering considerable employment opportunities.
Reflecting its dynamic growth, the online gaming workforce in India expanded 20-fold from 2018 to 2023, with a significant CAGR of 97 percent. The workforce grew from 100 percent in 2018 to 2,910 percent by 2023.
The technical workforce experienced a staggering 3,900 percent increase by 2023, with a CAGR of 109 percent. Gender dynamics in the workforce are also noteworthy, with the male workforce growing by 1.315 percent (69 percent CAGR) from 2018 to 2023, while the female workforce outpaced this with a 3.360 percent increase (103 percent CAGR).
The female workforce saw a notable gain of 740 percent in 2020 and a remarkable increase of 1640 percent in 2021.
Regulatory clarity and challenges
The report India’s online gaming industry is on a trajectory of rapid expansion, significantly impacting revenue, employment, and technological innovation. Still, it warned of some of the regulatory obstacles curtailing its expansion, specifically the recent Goods and Services Tax (GST) increase for the sector.
Since October 1st, 2023, online gaming companies are required to charge a 28 percent GST on the full value of bets.
For the report, the GST increase aligns the taxation of online gaming with that of lottery, betting, and gambling but sparked concerns about its negative impact on the market’s development.
‘However, the issuance of retrospective show cause notices by the Directorate General of GST Intelligence (DGGI) has compounded industry woes, with a GST demand totaling up to INR1.5 lakh crore ($18.52 billion), far exceeding the industry’s total revenue,’ the report highlights.
‘Industry experts warn that this move will discourage gamer participation, drive away legitimate platforms, create opportunities for illegal operators, and ultimately reduce the sector’s economic contribution,’ the report underscores.
The increase in GST was said to have already led to a significant reduction in profitability for gaming companies.
‘Operating costs have surged by 4x to 6x, forcing many companies to cut marketing budgets and lay off employees to mitigate financial strain. Startups are particularly vulnerable, with many promising ventures struggling to survive under the weight of the new tax regime. This could result in the loss of innovation and job opportunities, posing significant challenges for the industry’s growth,’ the report adds.
While the government has attempted to bring clarity to the industry by levying a 28 percent GST on the full face value of deposits, tax authorities have issued notices for GST dues, stating that all online gaming companies are akin to betting and gambling and must pay taxes on the full value paid by users.
This retrospective action significantly impacts smaller companies, pushing them towards unsustainable operations and potential closures, but the report warns that job cuts and operational streamlining are expected as companies face decreased revenue and increased expenses due to the new taxation policy.
Several gaming companies have raised concerns that this tax rate is unsustainable, especially for budding start-ups in the industry. Many online gaming platforms are already absorbing a portion or the full cost of the 28 percent GST to remain competitive.
The report cities the CEO of a leading online gaming start-up who commented that the high GST rate acts as a major hindrance in attracting much-needed foreign direct investment (FDI) into the sector.
As start-ups rely heavily on external funding to fuel expansion, innovate products, and enhance operations, a decline in FDI would directly impact the growth of both existing and new players in this rapidly evolving market.
Despite the government of India providing 100 percent clearance for FDI in the online gaming industry, the steep 28 percent GST levy is also seen as a significant deterrent for potential foreign investors.
Industry experts argue that a more sustainable tax structure is crucial to unleash the true potential of India’s vibrant online gaming ecosystem, which has emerged as a key driver of the country’s digital economy.
According to the report, these experts also urge the government to consider rationalization of the GST rate to ensure the long-term prosperity and global competitiveness of the sector.
