"Recent developments in the tax landscape and regulatory environment have left us with no choice but to bid farewell to our beloved gaming venture," Yadav posted on LinkedIn. He mentioned the changes around tax deducted at source (TDS) as a hit the company took.

Earlier, 30% TDS was deducted on online game winnings that exceeded the threshold of ₹10,000. But from 1 April, after changes were made to the Income Tax Act, a 30% TDS now applies on net winnings from online games in a financial year. Withdrawal of net winnings get taxed at source either when it crosses ₹100 or at the financial year end.

"This sudden change substantially impacted player earnings and motivation, leading to a decline in user engagement and loyalty," Yadav wrote.

From 1 October, real-money gaming companies, those who offer games like fantasy cricket and rummy, would have to brace for yet another regulatory disruption. Yadav wrote that this would "further compound our woes".

A 28% GST will have to be paid on the full value of amounts deposited by players for betting on online games, casinos, and horse races. However, redeployed winnings will be excluded from the indirect taxation.

How will this impact player motivation? Consider this:

Gaming platforms charge a fee of 10% . In the earlier tax format, platforms had to deduct a GST of 18% on the platform fee. So, if a gamer deposited ₹100 to play, the platform would charge ₹10 as its fee. The GST deducted would be ₹1.8.

From 1 October, 28% GST would be deducted on ₹100. Add to this a 10% platform fee, and the gamer's playing pool drops to ₹62. The collective prize pool of the gaming platform would therefore shrink—gaming companies believe that the smaller prize pool would impact their ability to attract or retain players. And smaller companies will struggle more than the large ones.

"As an entrepreneur, it has been heart-wrenching to see the dream we built with so much dedication and determination now facing an uncertain future. Our team has invested countless hours, sleepless nights into nurturing this platform, hoping to contribute to India's vibrant gaming landscape," Yadav wrote. He ended his long post with a photograph—co-founder Amit Kumar and him sitting together, staring at the camera.

The question other real-money gaming companies are asking is what happens next? There is nervousness in the air as they all wait to gauge how users behave on their platforms. That would determine their survival strategies, going ahead. And the tweaks their algorithms might need.

Keeping the players

Kolkata resident Kaushik Das took to playing rummy online two years ago, as restrictions enforced due to the covid-19 pandemic stalled his construction consultancy business. Since then, Das, 48, discovered online rummy to be an effective distraction. The money he makes only adds to his enthusiasm.

Das is a regular on RummyCulture, an online rummy tournament-based game offered by Bengaluru-based startup Gameskraft. But then, he said that there isn't any reason for him to not shift loyalties to another platform—a platform where his winnings and the money he keeps are maximized. Well, this isn't a sticky business if you can't help the player make enough money.

This poses the biggest challenge for India's online gaming sector. After the changes in the tax regime kick in, will they be able to retain gamers like Das?

Some companies fear they would drift to offshore gaming platforms. Bhavin Pandya, co-founder and co-CEO of Games24x7, a gaming company, believes that gamers could migrate to offshore and illegal platforms that pay no taxes, resulting in loss of revenue for the government and outflow of foreign exchange.

Online betting company FairPlay, which is licensed by Curacao authorities, had appointed Indian rapper Badshah and actor Jacqueline Fernandez as brand ambassadors earlier this year. Recently, it advertised 'No tax, No GST', along with a '300% first deposit bonus' for users.

On Wednesday, the GST Council stated that offshore gaming platforms serving Indian consumers require registration and that GST will be collected from them. Offshore online money gaming platforms who do not comply will be blocked. However, this is easier said than done.

Mint had earlier reported on how banned betting apps, located offshore, are finding ways to circumvent the law. Hundreds of apps have been banned by the Indian government but many remain active. Often, when an app with one domain (for instance, .com) is banned, it resurfaces with another domain (say, .in). Such apps can also tweak their names.

While it is too early for the Indian gaming ecosystem to come up with strategies to retain customers, industry experts suggest that companies can lessen the GST tax burden on the gamer. Rather than let gamers pay the full 28% GST, companies can initially absorb some of the cost. They could also lower the platform fees. That could keep customers from drifting away.

However, such a retention strategy would only work for the larger companies, those who can absorb the loss in revenue for some time.

"Bigger platforms with large fund reserves may take some part of the hit. Smaller companies would need to make greater investments to retain customers and spend on giving them incentives," said Bipin Sapra, partner, indirect tax policy at consulting firm EY. "Investor appetite in the sector has already gone down, and that may impact smaller platforms more," he added.

Considering the funding winter, raising money was anyway difficult. The regulatory changes have now switched off potential investors.

Angel investing platform Inflection Point Ventures was evaluating an investment in a real-money gaming startup late last year but didn't go ahead because it didn't get any regulatory clarity back then. The risk-reward ratio wouldn't play off well if a higher GST were to be levied, the firm had concluded.

"The new tax regime will have a huge negative impact on the businesses, if you purely look at unit economics. Too much money has been invested in this space, so mature companies will eventually find a viable solution. However, early-stage businesses may not have the capability to survive," said Ankur Mittal, co-founder, Inflection Point Ventures.

Larger platforms may need to dole out many more incentives for users in the form of discounts, bonus points and cashbacks.

"Just like footfalls in a mall, this is going to be about how many gamers come to play and who offers what incentives," said a consultant who didn't want to be identified. "Bigger players will now offer even bigger incentives so that the negative impact of GST can get washed down. So, we may see some players moving to larger platforms," he added.

Nonetheless, because of the hit to revenue and higher expense on account of more incentives, the larger companies will have to clamp down on expansion plans for a while to save cash. A gaming executive said that the new tax regime will peg back the industry by at least two years.

The end of small

A second casualty of the higher tax rate will be on market making.

A senior consultant to a leading online gaming firm, who requested anonymity due to ongoing strategy procedures within the firm, said that esports (short for electronic sports, a form of competition using video games) tournaments require niche skill-sets and have fewer organic participants. In contrast, real-money gaming is relatively easier and does not require companies to spend huge marketing budgets for user retention—the growth here is organic due to the prospect of people winning in large numbers. Nonetheless, creating a market for real-money gaming takes time and now, with the higher tax liability, the smaller firms will run out of the bandwidth needed to create that market.

India has about 200 real-money gaming startups. Now, only the top 10 can hope to survive, a second senior policy consultant, who works with an online gaming industry body, said.

"The heavy taxation regime means that only topline-heavy companies can scale up operations, while all small companies will not have the adequate finances to survive in this tax climate," he said.

The industry, therefore, is bracing for a wave of consolidation. The big fish will gobble up the small.

Today, Sporta Technologies (which runs Dream11) and Gameskraft are two of the biggest companies in the sector. Dream11's earnings, filed with the registrar of companies (RoC) under the ministry of corporate affairs and accessed by Mint shows that the company generated an operating revenue of ₹3,841 crore in 2021-22, growing over 50% from the year before. Its profit, however, declined by over 56% to ₹142 crore.

Gameskraft's filing showed operating revenue of ₹2,112 crore in 2021-22, again a rise by nearly 50% compared to the previous year. Its profit rose by over 28% to ₹937 crore.

Large companies such as these can consolidate the market. Sudipta Bhattacharjee, partner at law firm Khaitan & Co, said that most large operators would "perhaps even thrive in the long run."

Subscriptions?

Bhattacharjee informs that one model some gaming operators are experimenting with is subscriptions. Under this, gamers will have to pay a monthly subscription fee to the platform—akin to how one would subscribe to any streaming service today—in exchange for a set number of tokens being awarded on the platform. All games on the platform can be played using these tokens, which substitutes the need for depositing real-money before playing.

Why is subscription not a 'deposit'? If it isn't a deposit, then the 28% GST doesn't apply—or so the thinking goes.

Well, the money used for subscription services can be used beyond playing real-money games. For instance, it can be used to buy merchandise on the platform. But then, all this is a grey area and not all companies would like to go down this route.

At least three companies Mint spoke to clarified that they are not yet exploring a subscription model for their real-money gaming titles, citing restricted operating procedures, lack of clarity on returns, and potential regulatory scrutiny at a future date as the main reasons.

"While some companies are exploring a subscription model, such an avenue does not have the same revenue potential as real-money gaming," said Bhattacharjee. "As a result, growth in this model could be significantly affected. Further, while a subscription model may not be directly liable for the 28% GST, in case players make withdrawals with monetary value, it could attract scrutiny from the GST authorities," he added.

Go international

Meanwhile, some Indian gaming firms may explore overseas markets as a way to diversify.

Soham Thacker is founder CEO of Gamerji, an esports tournament app. Diversification, he feels, can offset the impact of regulations in India. "While we are going to obey the law of the land, we feel focusing on entering new international markets will serve as a good strategy to manage the impact of the GST levy," he said.

Later this month, Thacker is planning to visit Gamers8, an esports and gaming festival in Riyadh, Saudi Arabia. The country is planning a new esports city, to attract both jobs and tourists.