Understanding the 28% Tax Impact on India’s $8 Billion Fantasy Sports Market

India’s 28% Tax Hike on Gaming: Latest Developments and Implications
for 2024

Published: August 9, 2024

In a significant development for the Indian gaming industry, the Goods and
Services Tax (GST) Council has imposed a 28% tax on online gaming, betting, and
horse racing. This decision, announced earlier this year, has sparked
considerable debate and concern among industry stakeholders.

Impact on the Gaming Sector

The new tax rate, effective from August 2024, has sent shockwaves through the
gaming sector, which has been a high-growth area in India. The gaming industry,
which includes popular fantasy sports platforms and online casinos, has seen
substantial investment and rapid expansion in recent years. For instance, Dream
Sports, a leading player in the fantasy sports segment, has achieved a valuation
exceeding $8 billion.

Industry leaders argue that the steep tax hike will impact their
profitability and potentially lead to increased costs for consumers. Kumar
Shukla, Secretary General of the E-Gaming Federation (EGF), has voiced concerns
that the higher tax rate will diminish their ability to invest in new game
development and expand their business. Roland Landers, CEO of The All India
Gaming Federation, has criticized the tax as unconstitutional and detrimental to
the industry’s growth.

Government’s Clarification

In response to industry backlash, the Indian government clarified that the
new tax applies specifically to "real money gaming" and not to non-wagering
online games. This distinction aims to mitigate the impact on casual gaming
platforms, which will continue to be taxed at the previous rate of 18%.

Despite this clarification, the increase in tax on real money gaming is
expected to have significant repercussions. The tax hike affects platforms such
as Dream11, which has been a major player in the fantasy sports arena. Dream11,
with its extensive user base and substantial revenue, is likely to experience
reduced margins due to the increased tax burden.

Industry Reactions and Future Outlook

The new tax policy has led to a mixed reaction within the industry. While
some companies are strategizing to absorb the additional costs, others are
preparing for potential legal challenges. The Federation of Indian Fantasy
Sports (FIFS) has expressed concern that the tax hike could drive users toward
illegal betting platforms, thereby increasing regulatory challenges and reducing
government revenue.

For now, the focus remains on how companies will adapt to the new tax regime
and the broader implications for the Indian gaming market. As the industry
adjusts to these changes, stakeholders are closely monitoring the impact on
investment, user behavior, and overall market dynamics.

Conclusion

The 28% tax hike on online gaming in India represents a pivotal shift for the
industry in 2024. While the government aims to increase revenue from this
booming sector, the long-term effects on market growth and player engagement
remain to be seen. As the situation evolves, industry players and policymakers
will need to navigate the new landscape carefully.

On July 11, 2023, India’s Finance Minister Nirmala Sitharaman announced a new
policy targeting the gaming industry. The Goods and Services Tax (GST) Council,
consisting of federal and state finance ministers, decided to impose a 28%
indirect tax on online gaming, gambling, and horse racing. This announcement has
caused a stir in the global gaming industry and has led to significant concern
within India’s gaming sector.

Impact of the New Tax: The new tax rate is expected to
negatively impact the gaming industry in India. Industry representatives have
expressed concerns that the tax will hinder their ability to invest in new game
development, affect cash flow, and slow business expansion. Additionally, these
extra costs might be passed on to consumers, potentially reducing user
engagement.

Industry Reaction: Kumar Shukla, Secretary General of the
E-Gaming Federation (EGF), has argued that online gaming is a legal business
activity protected by the Indian Constitution. Roland Landers, CEO of The All
India Gaming Federation, criticized the tax as unconstitutional, unreasonable,
and outrageous.

Government Clarification: On July 21, 2023, the Indian
government clarified that non-wagering online games would not be affected by the
new tax policy and will maintain the previous 18% tax rate, aligning it with
other entertainment sectors like cinemas.

Focus on Fantasy Sports: The tax primarily targets
real-money online games, such as fantasy sports, which have seen rapid growth in
India. Dream Sports, a major player in this sector, is valued at over $8
billion. This valuation is striking when compared to the entire Indian gaming
industry’s market size of $1.5 billion in 2022.

Dream Sports and the Gaming Market: Dream Sports, founded in
2008, operates sports content platforms such as FanCode and DreamSetGo. Dream11,
a subsidiary, has become a leading fantasy sports platform, particularly popular
in India. The company’s valuation and revenue growth highlight its significance
in the gaming industry, with revenues reaching ₹38.4 billion ($336 million) in
2022.

Revenue Model and Legal Status: Dream11’s revenue model
involves taking a 20% commission on entry fees from players. Despite legal
challenges, Dream11 has maintained its operations, as Indian courts have ruled
that fantasy sports games are skill-based rather than chance-based, thus not
classified as gambling.

Effects of the Tax Increase: The new 28% tax will increase
operational costs for companies like Dream Sports, potentially leading to higher
entry fees for players or reduced company profitability. The tax may impact
player satisfaction and could lead to a shift towards illegal gambling
platforms, according to industry associations.

Global Context and Future Outlook: While India’s tax policy
targets fantasy sports and real-money gaming, similar models exist globally. For
instance, Skillz, a U.S.-based company, also operates in this space. The
increased tax rate will challenge companies to adapt their strategies to
maintain profitability and user engagement.

In conclusion, the new tax policy presents significant challenges for India’s
rapidly growing gaming industry, particularly for high-value fantasy sports
platforms like Dream Sports. The industry will need to navigate these changes
carefully to mitigate the impact on their operations and user base.

Frequently Asked Questions (FAQs) on India’s 28% Tax on Online Gaming

1. What does the 28% tax on online gaming entail?

The 28% Goods and Services Tax (GST) applies to the turnover of online
gaming, betting, and horse racing. This means that companies in these sectors
will be required to pay 28% of their revenue as tax.

2. When does the new tax rate come into effect?

The new 28% tax rate is effective from August 2024.

3. Does this tax apply to all types of online games?

No, the tax specifically applies to real money gaming, including online
betting and fantasy sports. Non-wagering online games are still taxed at the
previous rate of 18%.

4. How will this tax impact online gaming companies?

The increased tax rate is expected to impact the profitability of online
gaming companies. It may lead to higher operational costs and potentially
increase costs for consumers. Companies might also face reduced margins and may
need to adjust their business strategies.

5. What is the government’s rationale behind this tax hike?

The government aims to increase revenue from the rapidly growing online
gaming sector, which has seen significant investment and expansion in recent
years.

6. How are companies responding to the new tax policy?

Companies are exploring various strategies to manage the tax increase. Some
are considering absorbing the additional costs, while others may pass on the
costs to consumers. Legal challenges and lobbying efforts are also being
considered by some industry players.

7. What are the concerns raised by industry leaders?

Industry leaders have expressed concerns that the tax hike will reduce their
ability to invest in new game development and expand their businesses. There are
also worries that the increased costs might drive users towards illegal betting
platforms.

8. How might the tax increase affect consumers?

Consumers might experience higher costs for online gaming services. The
increased tax burden on companies could lead to higher prices for players and
potentially affect their overall gaming experience.

9. Will the tax increase affect companies like Dream11?

Yes, companies like Dream11, which are major players in the fantasy sports
segment, will be directly impacted by the new tax rate. The increased tax burden
could reduce their profit margins and affect their business operations.

10. What is the long-term outlook for the online gaming industry in
India?

The long-term effects of the tax hike on the online gaming industry are still
uncertain. The industry will need to adapt to the new tax regime, and the
overall impact on market growth, investment, and user engagement will be closely
monitored.