New tax implementation threatens to wipe out real-money games in India’s fantasy sports sector

Stay updated with the latest Indian business and finance news with our free email updates.

Sign up to receive a daily digest email, myFT Daily Digest, bringing you the top Indian business and finance news every morning.

Indian authorities are facing the task of determining a new tax system for online gaming, following strong opposition from companies and investors who argue that it would cripple the rapidly growing multibillion-dollar industry of fantasy sports and other real-money games.

The Goods and Services Tax Council of India, responsible for setting the country’s indirect taxes, is convening on Wednesday to discuss the implementation of a proposed 28% tax on stakes in online gaming. Industry estimates suggest this rate is over 1,000% higher than the current tax rate.

The proposed levy would mainly impact real-money games in which users can earn cash prizes, such as fantasy cricket or online rummy. This sector operates within a regulatory grey area and has attracted the attention of venture capitalists.

Although gambling is largely illegal in India, these real-money games have won court cases establishing their classification as “games of skill,” distinct from betting. However, the surge in their popularity has raised concerns among authorities about the potential for addiction.

Currently, companies collect commissions on consumer stakes and pay an 18% tax on those commissions. However, under the proposed change, the stake itself would be subject to a 28% tax, in addition to the commission. This would present a massive disincentive for gamers.

Roland Landers, CEO of the All India Gaming Federation, predicts that companies in the sector will suffer significant damage to their businesses. He states, “The larger ones may survive, but the mid-sized to smaller players would find it extremely difficult and, in fact, might face closure.”

Saumya Singh Rathore, co-founder of WinZo, an aggregator of real-money games, expressed concerns that the tax would jeopardize the platform. She stated, “We are certain that 85% of these games would become unviable, rendering WinZo as a platform unviable as well.”

Thanks to the widespread availability of smartphones and affordable data prices, India’s gaming market has experienced rapid growth in recent years. According to Lumikai, a gaming-focused fund, the market size reached $2.6 billion in the year ending in March 2022.

Real-money gaming companies dominate this market, including major startups like Dream11, the official shirt sponsor of the Indian cricket team. Investment in online gaming increased from $2.3 million in 2013 to nearly $400 million in 2021, according to data provider Tracxn.

Finance Minister Nirmala Sitharaman referred to the proposed 28% tax, which would also apply to horseracing and casinos (which are only allowed in certain states), as a “moral” issue. She questioned, “Should the tax on casinos be lower than the tax on essential goods?” Some restaurants and food services are currently taxed at 18%, the same rate as online gaming before the proposed increase.

Investor organizations in the sector, including Tiger Global and Peak XV (Sequoia’s rebranded India business), wrote a letter to Prime Minister Narendra Modi, urging the government to reconsider the tax.

The recommendations of the Goods and Services Tax Council, which represents the central government and Indian states, will subsequently be enacted into law.

Meyyappan Nagappan, a tax partner at Trilegal law firm working with gaming companies, expressed hope for some relief at the upcoming GST Council meeting. He stated, “Everyone is in a wait-and-watch mode, and there is still some optimism.”