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Higher GST on gaming: Is the sector up for the challenge?

The impact of the proposed 28% GST will be borne by game developers and advertisers but the marketing budgets are likely to stay unaffected, industry heads tell e4m

e4m by Shantanu David
Published: May 23, 2022 8:49 AM  | 5 min read
Gaming

The gaming world recently woke up to a GoM report that included a proposal to increase the GST levied on online gaming from 18% to 28%. According to news reports, the proposal says that GST will be levied on the gross gaming revenue and not on every transaction.

Does this come as a jolt to the Indian online gaming industry that is estimated to grow to more than Rs 15,000 crore in 2023 as per the latest e4m and GroupM ESP 'India Online Gaming Report'.  

According to Sagar Nair, Co-Founder and CEO, Qlan, The Gamer's Social Network, the spending of customers (in this case online gamers) will not be affected as most of the online games in the Indian market are free to play, and the only actual money spent by gamers is on add-ons, which are not a necessity to play these games. “The major impact that the application of 28% GST in the online gaming industry will be borne by the game developers and advertisers as a major share of the revenue will be given away as GST. The actual impact of the implication of the application of GST on online gaming is uncertain as it is one of the fastest-growing industries in India, and is projected to reach Rs 290 billion by 2025 in terms of revenue, and might become one of the biggest contributors towards the growth of the Indian economy.”

Nair noted that the application of GST to the online gaming industry was most likely to have a positive effect on marketing budgets and campaigns as a unified tax structure is bound to improve the products (Games) and the services offered by various companies in the sector.

“A unified structure also promotes proper segregation. In turn, a dedicated budget that focuses on marketing leads to appealing campaigns curated to drive the target audience to increase traffic,” he added.

However, Rohit Agarwal, Founder and Director, Alpha Zegus, a marketing agency specializing in the domains of gaming and lifestyle, suggests that for a country that is already very apprehensive about in-app spends (India has one of the lowest in-app spending in the online esports/gaming segment in the world), increasing the GST slab is going to demotivate these nascent industries further, saying, “It would mean that for every Rs 100 coins/credit that they want, they will have to pay Rs 128. Ideally, there is a need to lower the tax slab on an industry that's in its growth phase right now, so it breaks the initial barrier of 'discomfort' on in-app purchases.”

That being said, most agree that marketing budgets will stay unaffected, as the increase in GST is applicable only to in-app purchases or winnings, and not on ad platforms. However, marketing campaigns will have to be now adapted to 'distract' the audience from the GST mark-up, or companies will have to provide extra incentives to the users for the extra price they end up paying.

As for Rishabh Bhansali, Co-Founder, FanClash, this approach to treat games of skill and chance on par will be massively detrimental to the Indian gaming industry. “This will blur the difference between these business segments in consumer minds and will significantly impact adoption to skill-based gaming. As a result, higher focus and marketing spending is required to drive consumer and category education to mobilize adoption.”

However, Bhansali notes, “The proposed valuation rules to tax the entire entry fee, instead of the platform fee earned by skill game operators, will restrict marketing and advertising spends and CAC recoverability for such platforms, thereby putting pressure on unit economics. Hence, this creates a double whammy of sorts for skill-based online gaming businesses that could stifle the industry and affect gamers, gaming fans and the wider ecosystem as well.”

Sharing more on the advertising aspect, Akshae Golekar, CEO and Founder, Optiminastic Media says, “The advertising cost on specific games in apps will definitely rise. This will naturally push marketers to readjust their campaign budgets, which will make the brands re-evaluate their investments in trying to reach their target market. Brands, where the audience are gamers, will be okay with such a raise, but brands who have better options will eventually opt out from investing in such marketing activities."

Striking a optimism note, Prakhar Srivastava, Financial Controller, White Rivers Media, says that while the rate hike might cause some cash flow disruptions for the companies and we might see some costs being hiked for the users, the users will continue to engage with such apps since online gaming is thrill driven more than primary income driven. "GST hike, therefore, is not as directly correlated as it is for the other categories. Currently the 2.2B dollar industry and pegged to be one of the fastest growing and sunrise categories, advertisers should be bullish on the industry and this rate hike should be a small blip along the projected growth journey," he says, adding, "The in-app advertising again will not be affected as we don’t foresee any user dip due to this rate hike, brands will continue to spend where their audiences are."

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