Online gaming companies to incentive's players hit 28% GST
The gaming industry has been absorbing the higher GST without passing it on to customers, taking a hit to their margins. Gaming companies are also looking at other ways to lessen the impact of GST.
The online gaming industry, which is currently taking a hit on margins due to the 28 percent Goods and Services Tax (GST) in effect since October 1, is aiming to incentivise players to park their money on the platforms for a longer duration and change user behaviour over the next one year in order to reduce the impact on their net profitability, multiple industry players said.
The GST Council has revised the rate on online gaming from 18 percent to 28 percent on full face value effective October 1, 2023. “It’s a sizable increase in the GST rate. The GST burden is hitting the EBITDA (Earnings before interest, taxes, depreciation, and amortisation. It is the alternate method of measuring profitability in net income.) Positivity of companies. Over the next year the online gaming companies aim at changing user behaviour to keep deposits for longer to reduce the tax incidence.
The EBITDA positivity depends on changes in user and transaction behaviour over the next one year.
Every time a deposit is made by a player on an online gaming platform, 28 percent GST is payable on the face value. For taxation, the deposit duration is important, not the gaming time. If the same amount of money continues on a platform, the tax will be one time. In a month if a person withdraws and deposits three times, 28 percent GST is applicable every time a deposit is made, leading to a high tax incidence. Thus, if the user's behaviour is such that they keep money for long on an online gaming platform, the company gets more revenue for the tax paid.
“The industry currently is absorbing the higher GST and not passing it on to the players. In the books of online gaming companies, it will reflect a huge hit. So, the companies may provide incentives or bonuses to users for parking their money for a long on the platform. There may be different operational ways, we will experiment with how to change user behaviour. Then the EBIDTA positivity will grow. Companies are already experimenting with it and the impact will be seen after a year.
Additionally, the companies may also look to increase profitability by putting more money into advertisements and creating new users to keep the growth going, he said. The market size of the online gaming industry is estimated at $2.5 billion in FY24 which is expected to grow by 25 percent next fiscal. If the companies are able to change user behaviour over the next one year, the growth rate of 25 percent in the sector is likely to continue.
