October 1 Marks The Beginning Of Survival Battle For India’s Online Real-Money Gaming Startups
As October 1 approaches, India's online real-money gaming startups find themselves on the cusp of a major challenge. The implementation of a 28% Goods and Services Tax (GST) on the full-face value of bets is set to transform the 'game' of the USD2.9-billion industry within a span of six weeks. The industry is gearing up for a period of uncertainty and adaption as many startups have begun winding down operations, laying off employees, and cutting back on marketing spending. Players in this high-stakes game must strategically maneuver to ensure their survival as the government's new tax regulation takes effect.
India’s once flourishing online real-money gaming industry is bracing itself for a turbulent period as the 28% Goods and Services Tax (GST) on the full-face value of bets comes into effect on October 1.
With this new taxation policy looming within six weeks, the industry, valued at USD 2.9 billion, is preparing for challenging times ahead. Startups are resorting to drastic measures such as winding up operations, staff layoffs, and significant cuts in marketing and advertising expenditures in a bid to stay afloat until April next year, when the government has scheduled a review of the new tax regulation.
However, it is plain to see that this regulatory shift’s effects have already begun reverberating across the sector.
Sachin Yadav, the founder of Quizy, an online gaming platform, announced the closure of its real-money gaming venture due to the unfavorable tax and regulatory landscape.
Mobile Premier League (MPL) recently laid off 350 employees, and reports indicate that other gaming platforms like Hike and Spartan Poker have also handed out layoffs to 55 and 125 employees, respectively.
The Hard Hit
Given the hard times, industry insiders predict that this downsizing and consolidation trend will persist in the coming months, and they point out that this scenario could potentially lead to a concentration of power among a few major players, as larger businesses would have a competitive edge due to the new tax regime. Therefore, it is evident that smaller companies will be hit hardest.
Hence, for the online gaming industry, as the challenge looms large, several are formulating new strategies to cope with the new tax policy.
The Path of Least Resistance
Initially, the Indian government announced a 28% GST on online gaming companies, casinos, and horse racing, with the tax levied on the contest entry amount (CEA). This meant that a 28% GST would be applied regardless of whether a player was placing their first bet or using winnings from a previous game.
However, in an August 2 meeting, the GST Council modified this approach, opting to instead impose the tax on deposits rather than CEA.
This compromise was reached after discussions with gaming startup founders who believed that taxing CEA would severely harm the industry.
Entrepreneurs in the sector had initially pushed for the GST to be calculated based on gross gaming revenue, but the finance ministry rejected this proposal.
Some founders eventually came to accept the taxation on deposit amounts, viewing it as the “less painful way” to navigate the situation.
Nevertheless, concerns have been raised, as the rule disproportionately affects smaller players and new entrants, contending that unicorns and larger corporations can absorb the impact better, potentially leading to unintentional monopolistic practices.
Survival of the Fittest
An analysis of 100 real-money gaming companies in India revealed that only about a fifth are well-positioned to weather the storm of the new tax regime. Among these 20 companies, only a handful, which are profitable and backed by significant venture capital funding, are expected to survive the challenges ahead.
Consider the situation of three gaming unicorns in India – Fantasy sports platform Dream11, for instance, has a solid track record of profitability and significant revenue growth.
Games24x7, the operator of RummyCircle, boasts a profitable history and substantial funds to navigate the crisis. Gameskraft, which runs RummyCulture, one of the most profitable online gaming companies in India, has grown both its revenue and profit significantly.
In contrast, startups like PlayerzPot are grappling with uncertainty; with limited funding and a lack of profitability, these companies face a challenging road ahead.
Likewise, around 50 startups are in a precarious position, struggling to find a path to survival.
A Path to Monopoly?
Industry experts foresee a potential shift toward industry consolidation as smaller players face more significant challenges. The stark difference in the tax burden between smaller and larger companies could lead to a situation where larger businesses can weather the storm while smaller ones struggle to survive. This imbalance may inadvertently pave the way for a monopoly, as newer entrants and business models may be wiped out.
Preparation and Adaptation
Faced with a multitude of these challenges, gaming startups are taking various measures to weather the GST storm.
CEOs like Bobby Garg of Passion Gaming are cutting marketing expenses and focusing on conservative business strategies to preserve cash during the difficult period.
Others, like Mitesh Gangar of PlayerzPot, are exploring cost-cutting measures and alternative revenue streams to sustain their companies.
Saurabh Aggarwal, CEO of Octro, emphasizes the importance of diversification, profitability, and cash reserves in navigating the new landscape. Startups are also considering user incentives such as absorbing a portion of the GST cost to retain players.
A Glimmer of Hope
Despite the challenges and uncertainties, several founders remain cautiously optimistic. The imposition of GST on deposits is viewed as a more favorable outcome, albeit a temporary one.
In the interim, the industry is coming to terms with the reality and preparing to survive until more clarity emerges, whereas sector regulatory ambiguity has been an ongoing issue,
Ultimately, most gaming companies will focus on survival until the government reviews the tax rule next April.
The Last Bit, The online gaming industry in India is poised on the threshold of a critical period. The introduction of the 28% GST on deposits introduces a new dynamic that will undoubtedly impact the sector’s composition and competitive edge.
While the immediate challenges are substantial, this shake-up might ultimately lead to a stronger and more mature industry. As startups grapple with the uncertainty of the coming months, their adaptability, innovation, and capacity for survival will shape the future trajectory of India’s online gaming scene.
In the midst of a “game of survival,” the industry’s response to the GST challenge will most likely be a defining chapter in its evolution.
