Level up or game over? High-taxed online gaming startups eye policy breather from Budget
Online gaming and esports companies hope for policies to foster growth and request relief from intense taxation ahead of the Union Budget.
The online gaming and esports ecosystem in India is hoping for a boost from the upcoming Budget to be presented on July 23 as high taxes threaten to stagger growth.
“The gaming sector has seen exponential growth, driven by a young, tech-savvy population. We hope the upcoming Budget will recognise this potential and introduce measures that support game development, infrastructure, and talent development. Tax incentives for developers, investment in infrastructure, and support for local studios can position India as a global gaming leader,” Roby John, CEO and Co-founder, SuperGaming tells YourStory.
The online gaming industry in India has seen a rapid expansion mirroring the rise in digital reach across the country, adoption and rise of the 5G network, and pandemic-induced change in user consumption patterns. According to an EY report, India had about 455 million gamers in 2023.
Gaming companies earned a total revenue of Rs 22,000 crore in 2023 and are expected to grow at a compound annual growth rate (CAGR) of 21% to reach Rs 38,800 crore by 2026, according to a report by EY.
However, game development in India is still nascent amidst tight funding. The government has deployed some measures to encourage game development in India by allowing 100% foreign direct investment (FDI) into the sector and the inclusion of esports as part of multi-sports events.
"Gaming and esports have different needs and demands in the Budget. With esports now under national and international sports federations, esports would benefit from an increased investment in the sports budget and inclusion in national games such as Khelo India,” says Akshat Rathee, Co-founder and MD of NODWIN Gaming.
The gaming industry is expecting more policies to encourage domestic gaming hardware and game production development.
“We hope to see policies that encourage domestic manufacturing of gaming hardware, provide incentives for local production, and reduce import duties on essential components. This would ensure that our gamers are equipped with advanced gear,” says Vishal Parekh, Chief Operating Officer, CyberPowerPC India.
Earlier this month, 70 online gaming and esports companies drafted a recommendation letter to the newly formed government with 10 policies to help the sector.
The policy recommendations included regulatory streamlining, breaking up the categorisation of online gaming into distinct categories of video games and real money games, policies to support original IP creation and ownership, and frameworks for higher education in game development and esports, among others.
The companies also requested the government to tap into GST rationalisation, suggesting video games be moved from the 18% tax bracket to 12%.
Last year, the GST Council recommended that online money games be subjected to a GST rate of 28% on the total money deposited with the platform, resulting in a higher tax burden for companies. Previously, a GST rate of 18% was levied on the platform fee.
“The industry was used to a particular regular taxation from the beginning and it built its business models around it and that sudden taxation…was a shock. A lot of smaller players could not survive that,” explains Meet Shah, Founder of BeBetta—a sports engagement platform that prioritises social interaction and gamification over traditional betting, enabling users to place bets without any financial stakes.
The change in tax regime resulted from the GST Council differentiating between online games played by skills and those played by luck. However, this has posed several challenges for the companies.
“Companies are struggling to retain gamers, leading to widespread consolidation and pushing startups out of the ecosystem. Many startups have already shut down, laid off hundreds of employees, and are grappling with stagnant revenues,” notes Paavan Nanda, Co-founder of gaming platform WinZO.
Stakeholders also fear the high tax rate will curb innovation and slow growth for small companies, with investments already slowing down post-pandemic high.
Online gaming companies saw a sharp jump in investments in 2021 with equity funding touching $450 million. However, it has dropped significantly, with a mere $24.6 million raised in 2023, according to data from Tracxn.
Esports companies have mirrored the same funding pattern, with investments peaking in 2021 at $480 million, which have since dropped sharply to $71.1 million in 2023, data from Tracxn shows.
Another grey area building a regulatory framework. Real-money games do not operate under a legal framework, which makes it difficult for gaming startups as well as for the players to innovate domestically and express grievances. However, this is about to change.
In February, the Ministry of Electronics and Information Technology announced that it would prepare a framework for certifying real-money online games. The Ministry has proposed a self-regulatory organisation led by the industry, however, proposals submitted by the sector were rejected.
Edited by Kanishk Singh