How Real Money Games in India Plan To Hit Profit With New Tax Regime

Ever since the new tax regime imposed 28% GST on real money games in India, the companies associated with it are going through waves of challenges. After all, 28% GST on user’s deposits is strong enough to shake the whole real money games industry India to its core.

Do you think the industry will just wait and watch? Obviously not!

The associated companies are exploring various strategies to mitigate the impact of this tax.

What are those? You may wonder. 

To answer this question, we have presented a detailed breakdown on- How real money games in India plan to hit profit with the new tax regime?

Keep reading!

(A) Synopsis Of Real Money Games in India

On July 11, 2023, the landscape of online gaming faced a significant blow as the GST Council opted to impose a substantial 28% tax on the full-face value of online games. A meeting convened on August 2 (in the same year) clarified that this taxation would be applicable to the funds players deposit for game participation, preventing dual taxation when utilizing winnings for further gameplay.

Moreover, the government intends to amend Schedule 3 of the GST Act to encompass online gaming under the category of actionable claims. 

Historically, only lottery, betting, and gambling fell within this classification, excluding online gaming. Consequently, despite the industry’s efforts to differentiate between skill-based and chance-based games, the government has essentially aligned online real-money gaming with gambling.

The profound impact of the 28% GST on real-money games has been felt across the gaming sector. A notable example is the temporary suspension of operations by the real-money gaming app “Fantok,” and prior to that, the gaming unicorn MPL (Mobile Premier League) underwent a substantial downsizing, with over 350 employees laid off, constituting nearly half of its workforce. 

This scenario is indicative of the broader challenges faced by the industry at this time.

Note: We have described the whole issue here- “Taxation of Real Money Games Industry: Reason and Impact.” Here, we will discuss the strategies opted by the companies to tackle these challenges.

(B) Strategies: How Real Money Games in India can hit Profit With New Tax Regime?

In this section, we will theoretically look at various strategies that Real Money Games India companies are opting to increase their profits with the new tax regime.

Now, let’s dive into the details. Please note that, we will cover the case studies of different Indian real money gaming companies in the further section.

(B.1) Implementing Cost Effective Measures

In response to an increased tax burden imposed by the government, numerous startups are proactively implementing cost-cutting measures. This involves a comprehensive approach to saving money, including reducing operational expenses, renegotiating contracts with business partners, and optimizing their workforce for greater efficiency. A notable illustration of such cost-cutting efforts can be observed in companies like Fantok and One World Nation (OWN), which are actively adapting to these financial challenges.

(B.2) Revamping Business Strategies

The altered tax landscape has prompted gaming startups to reassess and revamp their business models strategically. In adapting to the new tax regime, startups are exploring alternative strategies, such as recalibrating pricing structures, introducing subscription-based models, and diversifying their offerings to include more skill-based games. This diversified approach aims to benefit from lower tax rates associated with games requiring more skillful gameplay.

(B.3) Engaging in Advocacy and Lobbying

Amidst the challenges posed by the 28% GST, some startups are actively engaging in advocacy and lobbying efforts. Their goal is to persuade the government to reconsider the tax imposition. Through participation in industry associations and collaboration with peers, these startups collectively voice their concerns and work towards influencing policy changes that could be more favorable to the industry.

(B.4) Embracing Diversification

Startups are not limiting themselves to their traditional business models. Instead, they are exploring diversification strategies to mitigate the impact of the new tax. This might involve broadening their service offerings or venturing into related sectors. The objective is to create a more resilient business structure that is less susceptible to the challenges posed by the imposed tax.

(B.5) User Awareness Initiatives

To ensure the retention of their user base, startups are proactively educating their customers about the implications of the new tax. Transparent communication is key, helping users understand how the tax changes affect them. By fostering understanding and transparency, startups aim to maintain trust and loyalty among their user community.

(B.6) Considering Legal Recourse

In certain cases, startups are contemplating legal action as a means to challenge the imposition of the 28% GST. This course of action becomes particularly relevant when startups believe that the tax is unjust or unconstitutional. Legal recourse offers a formal avenue for startups to contest the tax burden through established legal processes.

(B.7) Promoting Collaboration

Acknowledging the collective impact of regulatory challenges, startups are increasingly seeking collaboration with larger players in the industry. Through shared resources and collective problem-solving, these collaborations aim to mitigate losses and collectively address the regulatory challenges posed by the new tax environment.

(B.8) Global Expansion Strategies

To reduce dependency on the Indian market and diversify revenue streams, startups are exploring international expansion strategies. This forward-looking approach involves expanding their operations beyond national borders, tapping into opportunities in other countries, and navigating global markets to ensure sustained business growth despite the challenges posed by the new tax rules in India.

Gaming companies like WinZo, Lucid Labs, and Kratos Studios are looking to expand their market beyond India and are testing the Brazilian market for growth opportunities. For instance, WinZo is planning to invest $25 million as part of its expansion into the Brazilian market. This move is seen as a strategic development to tap into the potential of the Brazilian gaming market.

However, you must note that the specific strategies adopted vary based on individual startup characteristics, such as size, available resources, and the nature of their business. Despite these differences, the overarching objective for all startups remains the same i.e. to adapt to the new tax regime and ensure the sustainability of their businesses in a challenging economic environment.

(C) Case Study 1: Zupee’s Profit Strategy Amidst New GST Regime

First of all, let’s look at the financial performance of Zupee.

Matrix Partners-backed online real-money gaming startup, Zupee, reported a notable achievement despite the challenges posed by the new goods and services tax (GST) regime. In FY23, the company more than doubled its operating revenue to Rs.831.51 crore, demonstrating a robust performance. Additionally, Zupee strategically narrowed its net loss by 72% to Rs.36.5 crore, showcasing resilience in the face of the evolving tax landscape.

(C.1) Strategic Expense Management

Zupee’s key strategy revolves around effective expense management, crucial for mitigating losses under the new GST structure. Total expenses increased by 66% to Rs.900.78 crore in FY23. However, the company’s focus on careful planning is evident in the controlled rise of advertising and promotional expenses, which saw an 85% increase to Rs.703.33 crore. This category includes marketing costs, as well as cashbacks and bonuses provided to users.

(C.2) Revenue Model and Fee Structure

Zupee’s revenue model revolves around charging players a platform fee, recognized as a specified percentage of total gaming transactions. This fee structure serves as a significant revenue stream for the company. By emphasizing the optimization of expenses relative to revenue growth, Zupee aims to position itself favorably in the competitive online gaming market under the new tax framework.

(C.3) Industry Trends and Comparisons

Zupee’s performance aligns with industry trends observed in companies like MPL and Gameskraft. Despite the introduction of a 28% GST on full-face value from FY24, these firms have showcased revenue growth and a narrowing of losses. Zupee’s strategic approach reflects a commitment to financial sustainability and profitability, showcasing adaptability in navigating the complexities introduced by the evolving tax environment in the online gaming sector.

(D) Case Study 2: MPL’s Profit Making Plans with 28% GST

Mobile Premier League (MPL), a Bengaluru-based online real-money gaming company, has strategically navigated the challenges posed by the amended goods and services tax (GST) regime. 

You will find significant improvements in terms of its financial performance. In FY23, MPL experienced a significant reduction in net loss, decreasing sharply from $194.47 million (Rs.1,614 crore) in the previous fiscal year to $37.04 million (Rs.307 crore). This noteworthy achievement is attributed to the company’s adept financial management and business growth strategies.

(D.1) Revenue Growth & Expense Reduction

MPL’s revenue from operations witnessed a robust increase to $104.63 million in FY23, marking a substantial growth from $64.20 million in FY22 at a group level. Simultaneously, the company strategically reduced expenses by exiting the merchandise business during the year under review. This strategic move aligns with a broader trend observed in the online gaming industry, where companies are optimizing operations to enhance profitability.

(D.2) Merchandise Business Exit and Cost-Cutting Measures

In FY23, MPL strategically exited the merchandise business it had entered in 2021 after securing sponsorship rights for the Indian cricket team’s kits. The decision to exit this line of business, coupled with layoffs and market exits, demonstrates MPL’s commitment to navigating a challenging startup investment scenario and cutting costs to maintain financial sustainability.

(D.3) Impact of GST on EBITDA and Workforce

Despite positive earnings before interest, taxes, depreciation, and amortization (Ebitda) recorded in December 2022, MPL faced a setback with the amended GST regime in the online gaming industry. The GST on online real-money gaming was increased to 28% on full face value, compared to the previous 18% on platform fees. This led to a significant workforce reduction, with MPL laying off 350 people in response to the industry-wide impact.

(D.4) Business Growth Amid GST Challenges

While the GST move has impacted the bottom line of operators in the online gaming segment, MPL and other companies have demonstrated business growth in FY23. The company’s resilience is evident in its ability to absorb the increased tax payout to prevent user churn, aligning with the broader industry trend.

(D.5) Strategic Investment & Valuation

Founded in 2018 by Sai Srinivas and Shubam Malhotra, MPL has raised $396 million in funding and holds a valuation of $2.19 billion. The company’s strategic approach to financial management and its ability to attract substantial funding underline its potential for sustained growth in the online gaming sector.

In conclusion, MPL’s profit strategy amidst the new GST regime involves a combination of revenue growth, strategic expense reduction, business diversification, and adapting to regulatory changes. The company’s resilience and strategic decisions position it for continued success in the evolving landscape of online real-money gaming.

(E) Case Study 3: Gameskraft’s Profitable Strategy in the Midst of GST Hike

Gameskraft, a Bengaluru-based online gaming platform, has strategically positioned itself to navigate the challenges introduced by the amended Goods and Services Tax (GST) regime. In FY23, the company reported significant growth, with revenue from operations reaching Rs.2,662 crore, marking a nearly 25% increase from the Rs.2,113 crore generated in FY22. 

Despite facing scrutiny and a show cause notice for alleged GST evasion, Gameskraft experienced growth in both revenue and profit for the financial year ending March 31, 2023.

(E.1) Diverse Revenue Streams

Gameskraft’s total income stood at Rs.2,732 crore in FY23, up from Rs.2,153 crore in FY22. The primary sources of income included subscriptions, game downloads, and platform fees. The company operates various apps, including popular ones like RummyCulture, Playship, Pocket52, and Ludo Culture, showcasing a diversified portfolio contributing to its revenue growth.

(E.2) Profit Growth and Fiscal Management

Gameskraft’s total profit after tax increased by 14.2% to Rs.1,062 crore in the same period, demonstrating the company’s adept fiscal management and strategic decisions. Despite facing increased expenses, Gameskraft has successfully maintained a trajectory of profit growth in the evolving landscape of the online gaming industry.

(E.3) Expense Analysis and Marketing Strategies

While the company experienced substantial revenue growth, total expenses increased to Rs.1,300 crore in FY23, up from Rs.892 crore in FY22. Notably, marketing expenses quadrupled to Rs.408 crore in FY23, compared to Rs.92 crore in FY22, reflecting a significant investment in promotional activities. Business promotion costs surged from Rs.106 crore to Rs.208 crore, further contributing to the overall expenditure.

(E.4) Cost Categories and Industry Challenges

Gameskraft’s expenses encompass various categories, including gateway commission charges, legal and professional fees, domain and web hosting services, and corporate social responsibility expenses. The company has navigated challenges imposed by the GST Council’s decision to impose a 28% GST rate on online gaming, similar to other companies in the industry.

(E.5) Strategic Adaptations and Product Discontinuations

In response to industry challenges, Gameskraft strategically discontinued its fantasy offering, Gamezy Fantasy, in September 2023. This decision aligns with the company’s commitment to adapting its product portfolio to remain resilient in the face of changing market dynamics and regulatory environments.

(E.6) Industry Impacts and Comparative Trends

The online gaming industry, as a whole, has faced challenges due to the GST Council’s decision, resulting in significant operational changes among key players. While some companies experienced workforce reductions and operational suspensions, Gameskraft’s strategic decisions have allowed it to not only weather challenges but also achieve growth in revenue and profit.

Thus, Gameskraft’s profit strategy amidst the new GST regime involves diversifying revenue streams, prudent fiscal management, strategic marketing investments, and adaptability to industry changes. The company’s ability to navigate challenges and sustain profit growth positions it as a key player in the evolving landscape of online gaming.

Note: Do you know Gameskraft fuelled India’s gaming ambition? How? Go through the article “The Success Story of GamesKraft” and you will know about it.

(F) Case Study 4: Nazara Technologies’ Grabbing Opportunities in Crisis

Facing the impact of a hefty 28% GST on deposits in the Real Money Gaming (RMG) industry, Nazara Technologies sees an opportunity in acquiring crisis-struck RMG companies. The tax demand of over Rs.1.5 lakh crore has put pressure on companies, potentially making them available at attractive valuations. Nazara’s Chief Executive, Nitish Mittersain, acknowledges this opportunity and reveals ongoing conversations with some of these distressed companies.

(F.1) De-Risking Investment

Being a listed company, Nazara Technologies prioritizes de-risking its investments from any past tax claims that potential acquisition targets may be facing. The new taxation regime transfers the liability to the player, relieving platform providers from future taxation concerns. 

However, the challenge lies in addressing retrospective dues, which are nearly three times the books of these companies. Nazara aims to navigate this challenge effectively.

(F.2) Strategic Capital Position

With recent investments from prominent names like the Kamath brothers from Zerodha and SBI Mutual Fund, Nazara boasts a substantial capital base. Having built a war chest of Rs.510 crore and holding more than Rs.628 crore in cash and equivalents, the company is strategically positioned to explore acquisitions and strategic investments.

(F.3) Diversifying Portfolio for Growth

Nazara Technologies is not solely relying on acquisitions; it is also actively expanding its portfolio. The gaming and sports media platform recently unveiled its publishing division, planning to launch up to 20 games over the next 18 months. This initiative is backed by a substantial investment of Rs.1 crore per game. The company aims to foster growth across the Indian gaming ecosystem by enabling local developers to publish games globally.

(F.4) Past Investments and Acquisitions

Since getting listed on stock exchanges in 2021, Nazara has made significant investments and acquisitions. These include ventures such as Saudi media marketing agency Publishme, US kids’ entertainment platform WildWorks, and Indian ad-tech platform Datawrkz. These strategic moves contribute to Nazara’s goal of building a diverse and robust gaming ecosystem.

(F.5) Industry Challenges and Downgraded Projections

The RMG segment in India faces uncertainty and challenges due to heavy tax liabilities and industry consolidation. Venture capital investment firm Lumikai has downgraded its growth projection for the RMG segment to 5% over the next five years from the previously estimated 25%. The industry’s landscape is expected to shift, with the RMG category reducing its share from 60% to 32% by FY28.

Overall, Nazara Technologies’ profit strategy involves leveraging its strong capital position for strategic acquisitions, de-risking investments, diversifying its gaming portfolio, and actively participating in the evolving Indian gaming ecosystem. The company’s approach aligns with navigating challenges while capitalizing on opportunities presented by the new tax regime and industry dynamics.

(G) Supreme Court’s Stance on the New Tax Regime

The Supreme Court (SC) has addressed the challenges posed by the new tax regime, particularly related to the Directorate General of GST Intelligence’s (DGGI) tax notices to e-gaming companies. The notices, demanding GST on the ‘buy-in’ amount for each game, have sparked debates on the classification of online gaming as betting and gambling.

(G.1) Refusal to Grand Stay

The SC refused to grant a stay on the tax notices to e-gaming companies, opting to hear the matter on January 8. The notices assert GST on the ‘buy-in’ amount, considering the staking of money in online games, whether skill-based or chance-based, as a form of betting and gambling. The ‘buy-in’ is viewed as a transfer of goods, categorized as actionable claims.

(G.2) Petitions by E-Gaming Federation

The E-Gaming Federation and its members, Head Digital Works and Play Games 24×7, filed pleas challenging the notices. The federation faces a GST demand of Rs.6,497 crore, and Play Games 24×7 faces a demand of Rs.20,929 crore. They argue that there is no supply of an actionable claim by the online operators to players, making the imposition of GST “unsustainable.”

(G.3) Government’s Stand and Lack of Clarity for Real Money Games in India

Additional Solicitor General N Venkatraman informed the bench that the petitions were not served on the government. He emphasized the seriousness and sensitivity of the taxation issue related to online gaming. The government, aiming for uniformity, clarified that online gaming, betting, and gambling would be subject to a 28% GST on the full face value from October 1. This move followed the lack of clarity on the taxation of “game of chance” and “game of skill” exploited by some firms.

(G.4) Appeal for Limited Protection

Senior counsel Harish Salve and counsel Badri Narayanan, representing the federation and the companies, appealed for limited protection, citing the nationwide significance of the matter. They requested the tax department to withhold actions for three weeks until the SC fully hears the case. Show cause proceedings have been ongoing for months, with the companies providing necessary information.

(G.5) Constitutional Challenges

In addition to challenging the show cause notices, the petitioners contested the constitutional validity of Sections 9 and 2(52) of the Central Goods and Services Tax Act, 2017. They questioned Rule 31A(3) of the CGST Rules, 2017, alleging it to be ultra vires the CGST Act and violating constitutional articles 14 and 19(1)(g).

(G.6) Previous SC Intervention on real money games in India

On September 5, the SC stayed a Karnataka High Court order that quashed a Rs.21,000 crore GST notice issued to online gaming platform Gameskraft. The legal battles highlight the evolving landscape and the legal intricacies surrounding the taxation of online gaming in India.

In short, the Supreme Court’s current stance reflects an ongoing legal battle addressing the complexities of GST imposition on online gaming, highlighting the need for clarity and uniformity in taxation laws.

(H) India’s Real Money Games Landscape: Monetization Trends and User Dynamics

Fueled by India’s growing digital consumption, the gaming industry has evolved into a global hub, with impressive revenue figures. This section explores key monetization trends and the changing dynamics of users in India’s thriving gaming landscape.

(H.1) Global Gaming Industry Growith

In 2018, experts emphasized the scale and potential in the gaming industry. Fast forward to 2023, the gaming industry’s revenue has more than doubled to $396.13 Bn, surpassing the combined global revenue of movies, OTT, and music industries. Traditionally led by the US and China, 

India has emerged as a significant player, boasting 568 Mn gamers and 15.4 Bn mobile game downloads in FY23.

Don’t you wonder about the exact scenario in India? Let’s go through it one by one-

(H.2) In-App Purchases and Ad Monetization

India’s gaming sector witnesses substantial revenue, with $1.1 Bn generated from in-app purchases and ad revenue in casual and mid-core games. Projections indicate a growth to $5 Bn by FY28, signifying a notable uptick in monetization. In FY23 alone, the industry experienced a 37% YoY growth in in-app purchases, showcasing the diversification of gaming preferences among Indian users.

(H.3) Advertising Revenue Dynamics

Advertising revenue remains pivotal to the industry’s overall growth, with aggregate e-cpm’s in India exceeding $1. The in-game ad revenue is expected to achieve a steady 23% CAGR, reaching $1.7 Bn by FY28. This highlights the significant role of advertisements in driving revenue growth.

(h.4) User Evolution and Impact on Monetization

Recent researches reveals a 25% conversion of gamers to paid users, with the Average Revenue Per Paying User (ARPPU) soaring to $19.2 in FY23, a tenfold increase since FY19. Users’ evolution is a critical factor influencing monetization, with an increased average time spent on gaming by 20%, reaching 10-12 hours per gamer per week. Non-metro cities show an elevated affinity towards casual and mid-core gaming, contributing to sustained monetization growth.

(H.5) Survey Insights and Payment Preferences

In a Lumikai survey of 2,300 users, 41% play various game genres, showcasing a diverse range of play styles. Additionally, 23% of users who previously played games for free are now spending money on games. 

UPI emerges as a game-changer for the industry, with 62% of gamers preferring it as a payment method over credit cards. Popular games driving spending include BGMI, Free Fire, Ludo King, Candy Crush, Clash of Clans, Carrom King with MPL, and Dream11, indicating a willingness to invest in a broad spectrum of gaming experiences.

(H.6) Growth Outlook of Real Money Games in India

The combination of macro-tailwinds, convenient payment options, increased in-app purchases, and an engaged user base positions the Indian gaming industry for substantial monetization upside. With significant headroom for growth, the sector stands poised for continued success.

Overall, India’s gaming landscape reflects a dynamic interplay of evolving user preferences and strategic monetization trends, offering a promising outlook for the industry’s future.

(I) Wrap Up: Profit Making Strategies of Real Money Games in India

In navigating the challenges posed by the new tax regime, real money games in India are strategizing for profitability. Despite setbacks, companies like Zupee, MPL, Gameskraft, and Nazara Technologies showcase resilience. 

Zupee’s operating revenue doubled to Rs.831.51 crore, while MPL saw a sharp reduction in net loss to $37.04 million (Rs.307 crore) in FY23. Gameskraft reported a 25% increase in revenue to Rs.2,662 crore. Nazara Technologies eyes acquisitions amid a tax demand of over Rs.1.5 lakh crore. 

As these players adapt, the industry’s dynamic response reflects determination to not just survive but thrive in the evolving gaming landscape.