If the 28% GST is implemented, there would be significant changes in the online gaming business
A ‘potential write-off of USD2.5 billion’.
This is the staggering sum that venture capital investors in the online gaming business claim they would face if the government passes a 28% GST rate on the industry.
Two dozen global and local fund companies, headed by Peak XV Partners, Tiger Global, DST Global, Steadview, and others, wrote to the Centre last week, notifying it of the danger of losing the aforementioned funds as well as additional USD4 billion in prospective investments.
They claim that the decision to link the operations of real-money gaming businesses with casinos and horse racing has harmed the foundations of a developing sector that will produce USD2.9 billion in revenue by 2022.
Essentially, they claim, the future of a sector inhabited by 400 companies is in jeopardy.
Since the GST Council’s decision a week ago, entrepreneurs in this field have been yearning. According to the creator of an online rummy site, “it will be game over for the sector.” He went on to say that if this idea became law, the company’s deposits would decline by 40%. It will be difficult to manage the company unless players restrict their withdrawals, and they will have to close shop.
According to an article on the online media site The Arc, Dream11 estimates an 80% loss in operational profit as a result of the 28% GST announcement. Several persons ET Prime talked with said that it would be difficult for mid-to-small sized businesses to thrive, and investor interest is also expected to fall.
While the GST Council is expected to convene on August 2 to approve the 28% slab for online gambling, ET Prime examined 100 firms, their financials, and financing situation to better understand their viability in the face of severe revenue and user declines, even as interest in the industry is expected to fall.
The real-money gambling environment
ET Prime discovered that around 20 organisations, or one-fifth of those examined, are well-positioned to withstand the storm.
Only 37 of the 100 have raised some amount of finance. And three unicorns — Dream11, Games24x7, and MPL — have grabbed almost half of the USD2.5 billion invested in the industry.
They are well behind the others. In the series B through series D rounds, only a few hundred companies were able to raise early development stage finance. There are eight series A players and twenty seed players.
In terms of financial performance, 14 of the 100 companies are profitable, while 20 of them recorded significant revenue growth in FY22. For FY22, eleven firms recorded negative growth, while three reported moderate growth.
Consider some of the largest corporations and their financial statements.
Dream11, Gameskraft, and Games24x7 have financial reserves from accumulated income and financing, thus there are no imminent difficulties. They may even exploit this chance to strengthen their position in the coming online gaming shake-up.
Dream11, a fantasy sports platform, has raised USD725 million to far and is profitable, with double-digit revenue growth. The firm reported net earnings of USD17.97 million, a 55% decrease from FY21, and sales of USD470 million, a 50% increase from FY21 revenue of USD310 million. Dream11 can endure the GST shock since it has made profits in successive years and raised a large quantity of money.
Gameskraft, a Bengaluru-based gaming platform that hosts RummyCulture, has mostly been bootstrapped with the exception of a tiny seed financing in the early years. While sales increased by 48% to USD289 million in FY22, profits increased by 124.8 million, making it one of
India’s most lucrative online gaming enterprises. Furthermore, the company has around USD96 million in cash and equivalents, and the GST is unlikely to affect the company for some time.
Games24x7, which operates RummyCircle, has been profitable since fiscal year 2014. While it recorded a net loss of USD37.9 million and a 24% drop in sales for FY22, the company has USD100 million in the bank, which should be enough to see it through the crisis.
In a recent interview with ET Prime, co-CEO Bhavin Pandya said that the firm anticipates double-digit growth in FY23.
Apart from these enterprises, several startups have institutional investors or solid financials and hence have a chance of navigating the present crisis, even though they have yet to make revenues.
MPL, Zupee, WinZO, Head Digital Works (Ace23), Deltatech Gaming, and Sachiko Gaming, which operates PokerStars India, are among those involved.
Six venture-backed enterprises are in a pickle.
Their growth is negative, and their losses are mounting. There are around 21 enterprises that are not venture-backed. Six of them are profitable, while the other four are losing money. The remainder are not financially visible. Apart from that, 22 businesses have already ceased operations.
The jackpot in gaming
The real-money gambling business was having a great time prior to the announcement of the planned GST.
While most consumer Internet firms failed to earn money, online gaming companies fared better. The spread of cellphones and cheap data bundles fueled their expansion. During the epidemic, they grew by orders of magnitude.
The majority of the organisations ET Prime examined showed a considerable increase in sales between FY20 and FY21. In two years, Gameskraft’s sales quadrupled.
MPL’s income increased 24 times from USD3.2 million in FY20 to USD75.2 million in FY21. This pattern may be noticed across the industry.
This sparked a surge of venture funding. According to a Maple Capital Advisors research, Indian gambling businesses raised a total of USD350 million in the six years leading up to mid-2020. They raised USD544 million in six months, from August 2020 to January 2021. This will more than quadruple by 2022.
The GST Game
The plan calls for a 28% GST on the contest entrance price, rather than the previous gross gaming revenue/platform charge. The GST only applies to real-money games and does not apply to gaming studios or publishers. The 18% GST on in-app purchases remains in effect.
Consider how the GST now operates.
Take two participants, User A and User B, who each deposit INR100 to participate in a rummy tournament. The entire prize pool money is now about INR200.
The platform charge for playing is 10%, with customers paying 18% GST on top of that. This works out to INR23.6. Post-tax and platform charge, the total prize money available to the winner is INR176.4.
Earnings would be significantly reduced if the GST plan was enacted. Let us use the identical scenario of User A and User B, who both deposit INR100 to participate in a rummy contest.
They must now pay 28% GST on this deposit amount. This works out to INR72 per person, for a total reward pool of INR144. In addition, they must pay a 10% platform charge. The winner’s reward money is currently at INR130.
As a result, a player gains just INR30 against INR80 before, which may not be an appealing prospect for many.
This will have a significant influence on people that visit the platform.
Influence on the platform
On the condition of anonymity, a creator said that this is excessive and would result in a significant drop in transactions.
The founder of a mid-sized rummy platform, who did not want to be identified, said that this would have an effect on marketing expenditure, sponsorships, and software, which presently totals about USD1 billion. This economy will suffer as well, he continued.
Another important source of worry is the emergence of offshore enterprises focused on a game of chance that would target the Indian market. “I am already seeing such ads,” the entrepreneur said.
According to an executive who works with rummy platforms, “If this is implemented, it will be difficult even for big players.” Larger players may have a chance to survive; sadly, smaller businesses may not.” As previously mentioned, Dream11 anticipates an increase in operating profit of 80% with the adoption of 28% GST.
Furthermore, it will have an influence on investor interest. Gaming is one of the country’s fastest-growing industries, but it is the real-money gaming enterprises, such as rummy, fantasy sports, and poker, that have garnered major investment.
According to Karthik Prabhakar, co-founder of PeerCapital, an early-stage venture capital firm, there has been a rise of participants in the field in recent years.
However, unless there is a compelling argument, there is no incentive to invest in a firm just because it has been successful in the past.However, he said that restricting the industry via taxes is incorrect.
“I’m not in favour of simply taxing it at the highest rate because it’s gambling.”
“Then you’re basically saying it’s a way to control it rather than allowing an industry to grow,” he added.
This argument, however, does not hold water with everyone.
Not everyone agrees
On June 22, TVS Capital Funds chairman Gopal Srinivasan tweeted, “Sad to see eminent VC Funds write to PM opposing a socially redeeming measure.” Even worse, they degrade themselves with bogus threats like ‘loss of USD4 billion in prospective investments’ at a time when India is forging its own path.”
Even as its popularity grew, the real-money gambling business came under fire. Addiction has been a major worry, and in extreme cases, gamers have taken on massive debt, destroying families, and even culminating in death by suicide. In Tamil Nadu, Telangana, Andhra Pradesh, Assam, Nagaland, and Sikkim, they are illegal.
According to a Moneycontrol article, Ashwani Mahajan, co-convener of the Swadeshi Jagran Manch, “the government is well aware of this menace.” It should be mentioned that 40 million individuals play these online games, with 10 million doing so on a regular basis.”
According to Rohith Bhaskar, founder of 99Games, a gaming firm, games are played for fun rather than profit. In the case of real-money gambling, however, participants are betting or wagering money on something. “The purpose is to compete and win,” he said.
He said that the lack of regulatory clarity has resulted in lucrative enterprises, which is now changing since the government has a better understanding of the industry’s size and development.
“Government now treats online gaming — be it chess or cards — as something like luxury goods,” claimed a former CEO of a worldwide gaming business. It instituted a sin tax and obviously doesn’t mind making itself unappealing as a company. But, like with cigarette and alcohol tariffs, use has not decreased.”
Surprisingly, the Centre and state governments, regardless of party affiliation, are mostly in agreement on a 28% tax on internet gambling. “It’s not so much our stance as it is. “Every state felt it,” stated Finance Minister Nirmala Sitharaman.
Karnataka Revenue Minister Krishna Byre Gowda of the Congress party, which is in opposition at the Centre, argued last week that lowering gaming taxes will encourage gambling.
Speaking to reporters after the 50th GST Council meeting, revenue secretary Sanjay Gupta emphasised that the tax for playing video games has always been 28% and that nothing has changed.
“Courts have taken a certain view, and we are fighting these cases,” he added. This is merely a clarification, and it concludes the argument on this subject.”
The final version
There is some promise for gaming entrepreneurs and their investors in policy talks at the highest levels of government.
It is unclear if the 28% GST would be implemented, with the latest announcement from Rajeev Chandrasekhar, Union IT minister, stating that the tax will be reviewed by the GST Council.
There is a lot riding on August 2, when the GST Council is allegedly scheduled to consider the industry’s 28% tax.
In the meantime, paying exorbitant taxes is the only choice. Until there is clarification, the real-money gambling business will undoubtedly be less appealing in terms of venture investment and development potential.
High tax would have an influence on numerous of them’s decacorn, unicorn, and IPO objectives.
Another alternative is to consider producing games for other markets. Several gaming firms are already flourishing in India.
While RMG is severely taxed in established global markets, the dollar returns should make it an appealing proposition.
However, gaming entrepreneurs are not in the mood to pursue such opportunities at the time. They are knocking on every door to reduce the GST.
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