GST Impact on Fantasy Gaming and App Development-Sciflare Blog

Illustration of Fantasy Gaming Industry and GST Impact

22 Jul '23 0 Comments 614 Views Sciflare Technologies

Table of Contents:

Quick Summary of points

Understanding the complete impact of the 28% GST on fantasy games
How does it affect users and businesses and what is the way forward?
The next big thing for fantasy sports lies in recognizing the potential of online gaming
Survival strategies deployed by market players to survive the GST blow

It has been a year since a GST of 28% was levied on the full-face value of bets placed in online games. It came at a time when the fantasy sports industry was on an exponential growth path, with companies immersed in making their apps more valuable for users. With the announcement of a 28% GST, companies continue to face the challenge of paying more tax than what they earn. So, what does fantasy sports app development↗ look like in this scenario?.

We’ll give you an insider’s perspective in this blog from working with leading fantasy sports companies along with an objective view of GST impact on fantasy gamingf, share strategies helping market players survive the GST blow and what is the way forward for India’s sunrise industry.

GST on Online Gaming Before and After

AT A GLANCE

In-depth analysis of the 28% GST implication on users, businesses and the entire fantasy gaming ecosystem.
Challenges it cascades for market players
A nuanced understanding of the fantasy gaming scene in India

Classification of fantasy games

An eternal debate has followed in India on whether to classify fantasy games as games of chance or games of skill before the Supreme Court finally established that fantasy games like Dream 11 were games of skill, protected under Article (1) (g) of the Indian Constitution (without a direct mention of fantasy sports).

Amidst the debates, fantasy sports founders have continuously maintained that their platforms are offering a service to sports fans that lets them apply their fondness for games and skills to win rewards, as opposed to opportunities for gambling.However, with the imposition of 28% on games of skill and chance (where individual players have minimal roles) alike, inexperienced users and laymen may never understand the essential difference between them and confuse one for the other.

With regards to the different GST slabs in India, 28% GST is levied on luxury items, and since the past year, it has been levied on fantasy sports (considering them as means of entertainment and not essential services). Sports fans see fantasy sports apps as mediums of entertainment where they can win rewards by playing their favourite sport. Besides, Indian fantasy sports users are people across different income levels, including a high majority of students. As such, access to fantasy sports can get limited with such a high GST slab. A joint report by Deloitte and the Federation of Indian Fantasy Sports found that India had over 13 crore registered fantasy sports users as of 2022. That was nearly 10% of our massive population, projected to grow further until GST was announced.

Element of risk

Before the GST announcement last year, fantasy sports businesses had to deduct a TDS of 10% on a user’s winning amount of INR 10,000. As such, users had nothing to lose. Their incentive to pay the entry fee and join a contest was positively shaped by the high possibility of winning rewarding amounts- a natural outcome of confidence they had in their ability to win in their favourite sport. Since they had nothing to lose, there was no consideration and limit to their participation. As such, it was relatively easier for fantasy sports businesses to attract more users to their platform and maximize their profits.

Post GST declaration on each entry fee, as opposed to the Gross Gaming Revenue, every user has to pay a 28% GST fee just for entering a contest, irrespective of whether or how much they win. This automatically adds a major risk to their participation and pressurizes them even before the competition begins. Their focus automatically shifts to winning a bigger amount to substantiate their GST-loaded entry fee, undoing the risk-free nature of entertainment.

This has resulted in users dropping out of many fantasy sports platforms in India in the past year where they felt paying so much for one sport was not justified. This is where we see the direct impact of how GST affects fantasy gaming platforms as their user base shrinks, considering many users were from low or middle-income levels, and most of them were students.

This has led many market players to consider clubbing their fantasy sports offerings with other e-games, the market for which is even bigger with approximately 491 million online gamers in India as of 2024. This approach has been discussed at length in the blog ahead.

Focus of market players

Before GST, fantasy sports businesses were focused on expanding their user base and continuously innovating their platforms within the realm of fantasy sports. Retention was priority then as well, but it wasn’t a matter of life and death because users’ preference to stick to their favourite platforms depended on the experience it gave them, and not any risk that put their investment at stake.

Now too, market players need to focus on retention and expansion, but as part of a survival strategy. Retaining existing users is important to maintain business health, whereas expanding the user base is probably the only way to absorb the GST impact on platforms relying solely on fantasy sports. As profit margins shrink or diminish with the high GST slab, businesses have no way but to maximize users to generate profits and keep their platforms functioning as before. It is important to note that the 28% GST implication for fantasy sports will not pass on its own with time with users acclimatizing to it. This is because of the economic condition of users in India, most of whom do not have very high-income levels.

GST and Online Fantasy Gaming: What does it tell us about the Gaming Ecosystem in India?

AT A GLANCE

Challenges imposed by GST that online gaming can help navigate.
Notable advancements in the Indian e-gaming space.

GST tax rate effect on fantasy sports industry has led users and businesses to re-consider their actions. Indian users are naturally seeking offshore fantasy gaming platforms to free themselves of the high tax burden. Businesses are either bearing the cost of GST themselves, or relaying a portion of it to users, depending on their growth stage. According to a survey conducted by the US India Strategic Partnership Forum, covering 12 companies at different stages in the online gaming sector, only 5 have attained growth post the GST announcement. However, their growth range was somewhere between 0% to 25% as compared to the exponential 200% - 400% YOY growth witnessed by the sector before GST. Other companies participating in this survey have either witnessed stagnated growth or their revenue has declined by a significant 50%. In such a scenario, early-stage companies or those who were yet to make profit have completely lost their profit margins to GST and pay more tax than they earn.

However, before the GST amendment, the potential of the fantasy sports industry could not be questioned. It has been hailed as the sunrise sector of India, witnessing unprecedented growth within a very short time frame owing to digital-first users, better internet infrastructure, widespread availability of smartphones, and hassle-free interaction with online financial services. But even with 455 million online gamers (as of 2023) fond of fantasy games, card games, and casual games in India, India occupies a mere 1% market share of the global online gaming market↗, as mentioned in the report by USISPF.

The same report also mentions that Indian companies do not gain as much revenue from in-app purchases or advertisements as their Western counterparts. This highlights the major roadblock for Indian companies to diversify their offerings and revenue sources, which is necessary with a high portion of earnings lost to GST.

These statistics point to a conundrum of possibility, potential, and shift in perspective as far as fantasy games are concerned. The sector has not only created jobs and received unprecedented investor support, but also created a strong ecosystem along with services from other sectors, such as digital payments, e-commerce, marketing, and more. With the GST of 28%, the growth of this entire ecosystem is threatened.

However, while foreign investors may think twice before investing in fantasy games and try being risk averse, Indian investors of the likes of Nikhil Kamath are leading the charge by investing in online games. Nikhil Kamath, co founder of Zerodha, along with Ankit Nagori (Curefoods founder), and Prashanth Prakash (Accel India partner) is the co-owner of JetSynthesys Bengaluru franchise team for GEPL’s second season.The timing and motive behind this investment is noteworthy- taking India’s love for cricket to the world, leveraging team sentiment, universal love for cricket, and more engagement from users.

It tells us that the limitations imposed by GST on fantasy gaming can be overcome and left far behind by clubbing other online games along with fantasy sports offerings. These limitations can be transformed to opportunities for growth. For instance, fantasy sports apps have been affected by the economic condition of India’s young population. But this population is the world’s largest young population with 600 million people below the age of 35 as of 2023-2024. Not only are they fond of sports but can also fuel the gaming ecosystem with skill and employment opportunities. Other factors supporting the growth of online gaming in India are affordable smartphone and data consumption rates, a cherry on the cake for a nation so fond of sports and whose gaming culture is now a wide topic of discussion abroad.

How GST will affect fantasy sports apps?

AT A GLANCE

The immediate aftermath of the 28% GST on fantasy sports businesses
The ecosystem created by fantasy gaming and challenges it faces todays
Important considerations for fantasy sports businesses going forward.

It has been a year since fantasy sports companies have been grappling with the 28% GST levied on the entry fees by each user, as opposed to gross gaming revenue. It has affected the booming industry in the following manner-

Priorities:

Most evidently, innovation has been replaced by survival as a priority for fantasy sports businesses in India. Even the most established players are witnessing nominal growth margins, despite their wide user base. So, young market players and early-stage fantasy sports businesses find it a matter of time before they completely shut off operations paying such a high slab of GST.

With users dropping off from their platforms bearing the brunt of 28% GST, market players are having to try every possible means to retain them, giving them barely any scope to think through their strategies. The situation demands immediate action from them to immune the ecosystem they have created from such a massive blow and produces stifled innovation as its by-product. Stifled innovation passes on as a domino effect to other sectors tied up with fantasy sports offerings. This year’s IPL saw the immediate effect of GST as strategic marketing partnerships for better visibility and user engagement were compromised due to increased operational costs for fantasy sports operators↗

Difficulty in identifying a middle ground for users and businesses:

The 28% Goods and Services Tax rate effect on fantasy sports industryfalls on businesses and users alike. This is because the GST is not charged on the winning fee or the gross gaming revenue. As such, it has to be borne by users and fantasy sports businesses (some established players decided not to relay its effect on users), while smaller players had no such choice and find it difficult to attract more users because no one wants to pay a 28% tax on their entry fee irrespective of whether they win or not.

The GST presents a difficulty in finding an equilibrium for users and businesses in terms of a commission rate that will make sense for both parties. Fantasy sports companies have to cover their operational costs, including costs for server maintenance and so on. But after GST, the total cost of offering a fantasy sports platform to users has become prohibitively expensive because a commission rate that covers all making costs for businesses (including GST) is too high for users to find feasible.

Wealth creation and Investments:

The size of fantasy sports market in India is almost three times the size of North America, with 300 platforms sprawling across a user base of 180 million, according to a report by Deloitte India and the Federation of Indian Fantasy Sports. As of 2023, the industry was valued at INE 75,000 crore, with domestic and international investments. As of FY 22 end, the industry created 12,000 direct and indirect jobs.

Before GST, the fantasy sports industry in India had achieved these significant accolades in a relatively short time period, pointing to an unprecedented growth trajectory. The GST of 28% has affected jobs, employment, growth, and investments altogether, bringing a massive challenge for the sunrise industry. Major players like MPL and Spartan Poker laid off approximately 500 employees with other businesses ceasing operations in the face of rising operational costs and diminishing profits. The industry received approximately $2.6 billion in Foreign Direct Investment (FDI) since 2019 but saw no investment in the immediate aftermath of the 28% GST since October 1, 2023.

Cross-Sector Opportunities:

The fantasy sports industry in India has created an ecosystem full of opportunities for cross-sector services too, with major ones being fintech, cyber security, ed tech, and so on. Besides, the Indian fantasy sports industry has, in the six years leading to 2023, invested INR 3100 crore in real-sports partnerships and is expected to make a cumulative contribution of INR 29,000 crore to the sports economy between FY 22 to FY 27.

The massive potential of Indian sports is highlighted here and this major boost to the overall sports economy can go a long way in establishing our games on the global map. However, with the high GST slab, businesses have had to consider their spending and direct all attention towards absorbing its impact on their users and businesses.

These were some of the tax implications for online gaming in India But with everything said, we cannot overlook the sector’s potential and systems of value fantasy sports businesses have created, despite not having a strong gaming ecosystem comprising investors, developers, and innovators, as in other countries, or an established framework that helps them through successful models of the past.

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Market Trends Post GST

AT A GLANCE

How are fantasy sports businesses surviving the GST blow?
The importance of incentivizing users to absorb the GST impact
Sustainable survival and growth strategies for the future ahead

The GST of 28% has posed a cascading challenge of survival to all market players alike. High operating costs and low incentives for users have challenged fantasy sports businesses to re-envision their business models to minimize the GST shock for users and retain them in due course.

Established players like Dream 11 and Games 24/7 are leveraging discount points equivalent to the GST amount for users.

Being unicorns and having reached scale, these operators have been able to prevent the GST impact from reaching users. Dream 11 maintains that deposit amounts entered by users will be considered inclusive of GST, so users do not have to pay an additional charge on their deposit entry amounts. Users get discount points worth the GST amount as virtual money in their wallets, valid for up to 90 days, which they can use as a bonus to play. This is in keeping with Section 15 (3) of the CGST Act, which exempts discounts from tax valuation on meeting required criteria.

Strategies like these underscore the importance of incentivizing users to absorb the GST impact and maintain the excitement for fantasy games and rewards. However, smaller players can find it challenging to sustain this even as larger players feel the heat to keep this going.

Another strategy includes implementing other casual games along with fantasy sports in an attempt to engage users with multiple games. Businesses like MPL and PlayerzPot are following this route. The idea is to multiply revenue sources and enhance offerings, incorporate ads, and grow the user base to gain volume and immunize the platform from the GST burden. There is no specific business model yet, but these survival strategies highlight the spirit of innovation to tap into the potential of online gaming.

Conclusion: Future of Fantasy Gaming with GST

Fantasy gaming has witnessed exponential growth, but with the high GST slab, the industry is facing a threat to re-invent its path to profitability. Having once been the apple of investors’ eye and growth engine for the nation’s economy, it now faces a challenge to survive. But it is here that considering the even bigger potential of online gaming should be considered and market players should look at incorporating multiple games along with fantasy sports. The competition for the top market share will soon see players offering a comprehensive gaming experience along with fantasy sports in this difficult, but necessary leap forward. The ones recognizing this potential of online gaming and India’s tech infrastructure will surely benefit from the early adopter advantage.

Key Takeaways

The current GST rate on online gaming has negatively impacted the young fantasy sports industry in India.
The GST effect cascades to the entire ecosystem created and touched by fantasy sports, impeding its potential to strengthen our sports economy.
User engagement and retention is the most challenging priority and a means of survival, yet again.
Online gaming and clubbing more games together with fantasy gaming is the next leap market players should consider to survive this blow.

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Frequently Asked Questions

1.Will GST raise costs for fantasy gaming?

Yes, GST will raise costs for fantasy gaming because it is levied on users’ entry fee and not Gross Gaming Revenue. However, businesses can decide whether to pass this cost to users or device ways to absorb its impact on the platform.

2. How to win in the fantasy gaming industry with GST?

Surviving the Fantasy gaming industry and GST is challenging, but by considering innovative means of incentivising users, clubbing more online games and devising new business models to acclimatize the impact.