India’s likely 28% GST on gaming companies set to kill many players, hurt FDIs: WinZo Co-founder Rathore

The proposal to impose a 28% tax on gaming companies that are still in the process of building IP and technology can be a call of doom for these companies, said Saumya Singh Rathore, a co-founder of gaming platform WinZO Games. In an exclusive interview with ET Online’s Gourab Das, Rathore said the possibility of imposing higher taxes poses challenges, not only impacting the runway of early-stage innovation-driven startups but also potentially shrinking access to FDIs and capital for even larger, more mature companies.

What is your take on the proposed 28% tax on online games?

Saumya Singh Rathore: Gaming is a fast-evolving sector with a very diverse composition. There are 15-20-year-old large companies in Fantasy and Rummy, while at the same time, the sector also has more than 900 startups that are less than 5 years old and are focusing on newer models and creating products that currently address the needs of Indian consumers exclusively. Companies that have achieved stability might be able to handle any additional tax burden, as they have a stable revenue model at scale and matured margins. However, newer ventures would need to direct the resources available to them towards the creation of intellectual property (IP) and technology, especially given that the capital pool has dried up due to macro conditions.

Proposing a 28% tax for gaming companies that are still focusing on building IP and technology would kill the companies in the sector that are building for tomorrow. It will lead to the demise of many smaller players and deter any new entrants with alternatives to foreign products and technology. The burden of higher taxes will stifle innovation and prevent companies from scaling up, ultimately harming the larger technology industry as a whole.

Given the increasing industry size of online games, will this tax be detrimental to the country’s business scenario?

Saumya Singh Rathore: Entrepreneurs who are currently in the ecosystem are the ones building a potential sector that can create the world’s gaming epicenter out of India, employing millions in technology and product creation. The sector has the potential to create at least 5 decacorns and 10 unicorns in the near term, contributing meaningfully to the country’s GDP and becoming the next line of export. The gaming industry exemplifies the importance of attracting top talent to the sector. China witnessed a surge in talent from various fields, including technology, business, and fine arts, moving into the gaming sector. Gaming even surpassed banking in terms of prestige, leading to the rise of companies such as Tencent and Garena. Such success stories necessitate the development of an entire ecosystem, including supportive policies and favorable taxation. The industry has seen significant investment from both domestic and international investors. However, the possibility of imposing higher taxes poses challenges, not only impacting the runway of early-stage innovation-driven startups but also potentially shrinking access to FDIs and capital for even larger, more mature companies. India has the opportunity to become a leader in the global gaming industry, but even discussions of imposing a 28% tax send a negative message to global investors, who may perceive it as a lack of government encouragement for the sector.The 28% GST is typically imposed on either luxury or the so-called sin items. Will that tag also hurt?

Saumya Singh Rathore: Taxation plays a significant role in shaping investment decisions as it is a direct reflection of policymakers’ sentiments on the sector. Over the past 18 months, the gaming sector, despite being the fastest-growing sector, has experienced a complete halt to funds flowing into it. Even discussions of categorizing gaming as a sin tax create uncertainty and discourage both foreign and domestic investments. Any perceived lack of encouragement from policymakers further amplifies the perception of risk, causing potential investors to withdraw and impeding the flow of foreign direct investments (FDIs).

Categorising gaming as a sin tax not only impacts the industry economically but also culturally. It may deter some of the best talent from engaging in the sector to build technology and IP for export from the country, thus obstructing the growth and potential success of the industry.

It is also pertinent to note that a higher tax bracket of sin tax is consciously made applicable to products that are considered “avoidable” (such as cigarettes, liquor, gambling, etc.) or services that are considered luxury (luxury hotels, luxury cars, expensive movie tickets, etc.). However, services that are commonplace and used regularly by a large proportion of the populace, even lower than 18% GST rates. It will be hurtful when online gaming for the masses is taxed at par with high-end luxury goods and services. As a platform, we have observed that 90% of our consumers are from the middle and lower-income segments and reside in non-urban India (Bharat). For example, WinZO is the cheapest alternative for our audience, who on average spend Rs. 200- Rs. 300 as an alternative to monthly subscriptions of platforms like Netflix, Amazon Prime, etc.

Are there risks to the industry with the government’s categorization of games and determining what is permissible or non-permissible?

Saumya Singh Rathore: The categorisation allows the government to differentiate between legitimate players and illegal entities, treating them differently and avoiding knee-jerk reactions from the states. It allows the government to protect Indian consumers from illegal products.

The central government’s inclusion of online gaming in IT rules is a net positive. It further legitimises the category and resolves conflicts between companies and states regarding game classification. The certification process through the SRO is a critical process. If not well implemented, it may hinder fair market access for otherwise legitimate businesses.

Over the past 18-24 months, India has witnessed an influx of offshore betting and gambling companies, putting vulnerable mobile-first users at risk. The illegal offshore betting and gambling category in India is estimated to be much larger than the legalized gaming category, exposing consumers and their money to significant risk. The Central Government’s involvement was much needed and came at just the right time to take holistic steps to protect consumers. The past 18 months have also seen aggressive and progressive initiatives by Consumer Affairs and Information and Broadcasting to restrict access of illegal businesses, imposing clearer guidelines for businesses reaching consumers through mass-media or the internet.

However, isn’t there a fine line between fantasy sports being a game of skill or chance?

Saumya Singh Rathore: Fantasy has been declared a game of skill by the Supreme Court of India. The Supreme Court’s verdict provides clarity, reducing the grey area after much examination of the model. At WinZO, we create games that prioritize the preponderance of skill to provide an engaging experience for users.