Online gaming firms are staring at steep hits on their finances after tax authorities decided to bump up levies on the nascent sector to 28% of net revenue, from 18% earlier.

"Of course, our operating margin will take a hit due to the increased tax rate. In the short run, yes there will be an impact (on users and profitability)," said Trivikraman Thampy, co-founder and co-chief executive of online gaming startup Games24x7.

He added that the company, which hosts RummyCircle and My11Circle, is working on finalising an operating model that would help it soften the tax blow while keeping impact on users minimal. "Our focus is on FY28, and we see plenty of opportunities for growth in the next five years," Thampy said.

Harsh Jain, chief executive of fantasy sports app Dream11's parent firm Sporta Technologies, has signalled a similar near-term future.

In an interview with Mint on 6 December, Jain said the company's revenue would likely be hit by nearly 40% over the next two fiscal years, and Ebidta by 60%. Ebidta, or earnings before interest, depreciation, taxes and amortisation, is a key metric of operational profitability.

Jain attributed this to the company having to absorb some or all of the impact of the new tax rate, as well as needing to diversify and look at acquisitions to grow other monetisation avenues. He did not explicitly mention if the company's users would be directly affected by the higher taxes.

Other online gaming companies, while not passing on the tax burden, are finding different ways to soften the tax blow.

Sudhir Kamath, chief operating officer of publicly listed gaming group Nazara Technologies, said the company's users would not be directly affected as a result of the higher taxes.

"Many smaller companies will definitely take a hit in their profitability and revenue. For Nazara's Classic Rummy, there has been no GST burden added on to a user," he said.

"We are, however, innovating to manage the added tax burden, such as by nudging regular users to not make withdrawals every single time they play. Certain discounts have also been withdrawn in order to optimise the overall expenditure."

Nazara, which reported ₹1,091 crore in operating revenue in FY23, with its rummy title contributing ₹53 crore, or 4.9%. This figure is likely to decline, Kamath said, adding that the revenue share of Classic Rummy has already started declining since the new tax rate was enforced.

The new tax rate for the gaming sector was cleared in Parliament on 11 August.

Dream11 did not respond to an emailed query on the matter.

Bengaluru-based Gameskraft, among the largest private online gaming firms in the country by revenue and valuation after Dream11 and Games24x7, declined to comment.

Industry veterans said that while large online gaming firms would be able to absorb a portion of the higher levy, the challenge would be to retain users while passing on some of the tax burden to them.

"A large chunk of the users in the online gaming sector are not the young demographic that most gaming firms generally flag. This sector represents older users for whom these rummy titles have simply replaced the same game in the digital form," said a senior executive at a large gaming firm that offers rummy and poker games, asking not to be identified.

"If such large tax burdens are imposed on them, this will impact their total playable prize pool—there's bound to be some churn as a result."

Dream11, Gameskraft and Games24x7 run fairly sizable operations. On 20 October, Dream11 announced it had 200 million net user registrations on its platform. It reported ₹3,841 crore in net revenue and ₹142 crore in net profit in FY22—as per its latest available regulatory filings.

Gameskraft, as per public reports, has over 25 million active users just on RummyCulture—one of its core offerings. In FY23, the company reported net revenue of ₹2,662 crore, and net profit of ₹1,062 crore.

Games24x7 has over 100 million users across its offerings, as per public reports. The company reported net revenue of ₹1,169 crore in FY22, while heavy advertising and marketing operations saw it report a net loss of ₹282.4 crore for the period.

It now remains to be seen how these figures—both user base and financials—are impacted, with new and untested pricing models yet to see how they are accepted by online gamers.